<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
----------------
To Our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (Meeting) of
Prudential Multi-Sector Fund, Inc. (Multi-Sector Fund), will be held at 9:00
a.m., eastern time, on June 18, 1998, at Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102-3777, for the following purposes:
1. To approve an Agreement and Plan of Reorganization and Liquidation
whereby all of the assets of Multi-Sector Fund will be transferred to
Prudential Jennison Growth Fund (the Growth Fund), a series of
Prudential Jennison Series Fund, Inc., in exchange solely for Class A,
Class B, Class C and Class Z shares of the Growth Fund and the Growth
Fund's assumption of all of the liabilities, if any, of Multi-Sector
Fund; and
2. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.
Only holders of shares of common stock of Multi-Sector Fund of record at the
close of business on May 1, 1998, are entitled to notice of and to vote at
this Meeting or any adjournment thereof.
S. Jane Rose
Secretary
Dated: May 12, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED STAMPED SELF-ADDRESSED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
PROSPECTUS
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
AND
PRUDENTIAL MULTI-SECTOR FUND, INC.
PROXY STATEMENT
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
----------------
Prudential Multi-Sector Fund, Inc. (Multi-Sector Fund) is an open-end,
diversified, management investment company. Prudential Jennison Series Fund,
Inc. (Jennison Series Fund) is an open-end, diversified, management investment
company comprised of three portfolios, one of which is the Prudential Jennison
Growth Fund (the Growth Fund). Both Multi-Sector Fund and Jennison Series Fund
are managed by Prudential Investments Fund Management LLC. If approved by the
Multi-Sector Fund shareholders, the Growth Fund will acquire Multi-Sector
Fund's assets and assume its liabilities. The Growth Fund and Multi-Sector
Fund have identical investment objectives; each seeks to achieve long-term
growth of capital. Multi-Sector Fund has a secondary objective of current
income. Multi-Sector Fund seeks to achieve its investment objective by
focusing its investments in domestic and foreign securities, primarily equity
securities, of companies in certain economic sectors. The Growth Fund seeks to
achieve its investment 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.
This Prospectus and Proxy Statement is being furnished to shareholders of
Multi-Sector Fund in connection with the solicitation of proxies by Multi-
Sector Fund's Board of Directors for use at a special meeting of Multi-Sector
Fund shareholders to be held on June 18, 1998, at 9:00 a.m., eastern time, and
at any adjournment thereof (Meeting). The primary purpose of the Meeting is to
vote on a proposed Agreement and Plan of Reorganization and Liquidation
(Plan), whereby the Growth Fund will acquire all of the assets of Multi-Sector
Fund and assume all of the liabilities, if any, of Multi-Sector Fund. If the
Plan is approved by Multi-Sector Fund's shareholders, all such shareholders
will be issued Class A, Class B, Class C and Class Z shares of the Growth Fund
in exchange for the Class A, Class B, Class C and Class Z shares,
respectively, of Multi-Sector Fund held by them, and Multi-Sector Fund will be
liquidated.
This Prospectus and Proxy Statement sets forth concisely information about
Jennison Series Fund and the Growth Fund that prospective investors should
know before investing. This Prospectus and Proxy Statement is accompanied by
the Prospectus of Jennison Series Fund dated January 23, 1998, which
Prospectus is incorporated herein by reference. The Prospectus of Multi-Sector
Fund dated June 30, 1997, including September 8, 1997 and March 31, 1998
supplements thereto, which Prospectus is incorporated herein by reference, the
Annual Report to Shareholders of Multi-Sector Fund for the fiscal year ended
April 30, 1997, the Semi-Annual Report to Shareholders of Multi-Sector Fund
for the six months ended October 31, 1997, the Annual Report to Shareholders
of the Growth Fund for the fiscal year ended September 30, 1997, and the
Statement of Additional Information of Jennison Series Fund dated January 23,
1998 have been filed with the Securities and Exchange Commission (SEC), and
are available without charge upon request to Prudential Mutual Fund Services
LLC, Raritan Plaza One, Edison, New Jersey 08837 or by calling the toll-free
number shown above. Additional information contained in a Statement of
Additional Information dated May 12, 1998, forming part of Jennison Series
Fund's Registration Statement on Form N-14, has been filed with the SEC, is
incorporated herein by reference and is available without charge upon request
to the address or telephone number shown above.
Investors are advised to read and retain this Prospectus and Proxy Statement
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.
The date of this Prospectus and Proxy Statement is May 12, 1998.
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC. PRUDENTIAL JENNISON GROWTH FUND
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
PRUDENTIAL MULTI-SECTOR FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
----------------
PROSPECTUS AND PROXY STATEMENT DATED MAY 12, 1998
----------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation (Plan) and is qualified by reference to the
more complete information contained herein as well as in the Prospectus of
Prudential Multi-Sector Fund, Inc. (Multi-Sector Fund) and the information
relating to Prudential Jennison Growth Fund (the Growth Fund), a series of
Prudential Jennison Series Fund, Inc. (Jennison Series Fund), in the enclosed
Prospectus of Jennison Series Fund. (Multi-Sector Fund and Jennison Series
Fund or the Growth Fund, as applicable, sometimes are referred to herein
individually as a Fund and collectively as the Funds.) Shareholders should
read this entire Prospectus and Proxy Statement carefully.
GENERAL
This Prospectus and Proxy Statement is furnished by the Board of Directors
of Multi-Sector Fund in connection with the solicitation of proxies for use at
a Special Meeting of Shareholders of Multi-Sector Fund (Meeting) to be held at
9:00 a.m., eastern time, on June 18, 1998 at Prudential Plaza, 751 Broad
Street, Newark, New Jersey 07102-3777. The purpose of the Meeting is to
approve or disapprove the Plan, pursuant to which all of the assets of Multi-
Sector Fund will be acquired by, and all of the liabilities of Multi-Sector
Fund, if any, will be assumed by, the Growth Fund, and to transact such other
business as may properly come before the Meeting or any adjournment thereof.
The Plan is attached to this Prospectus and Proxy Statement as Appendix A. The
transactions contemplated by the Plan in summary provide that the Growth Fund
will acquire all of Multi-Sector Fund's assets in exchange solely for Class A,
Class B, Class C and Class Z shares of the Growth Fund and the Growth Fund's
assumption of all of the liabilities, if any, of Multi-Sector Fund. The Class
A, Class B, Class C and Class Z shares of the Growth Fund thereafter will be
distributed to the former shareholders of Multi-Sector Fund, and Multi-Sector
Fund will be liquidated.
Approval of the Plan requires the affirmative vote of a majority of the
outstanding shares of common stock of Multi-Sector Fund. Approval of the Plan
by the shareholders of the Growth Fund is not required, and the Plan is not
being submitted for their approval at the Meeting.
THE PROPOSED REORGANIZATION AND LIQUIDATION
The Board of Directors of Multi-Sector Fund and the Board of Directors of
Jennison Series Fund, on behalf of the Growth Fund (each, a Board), have
approved the Plan, which provides for the transfer of all of the assets
2
<PAGE>
of Multi-Sector Fund to the Growth Fund in exchange solely for Class A, Class
B, Class C and Class Z shares of the Growth Fund and the assumption by the
Growth Fund of all of the liabilities, if any, of Multi-Sector Fund. If the
Plan is approved by the Multi-Sector Fund shareholders, Class A, Class B,
Class C and Class Z shares of the Growth Fund will be distributed to
shareholders of Multi-Sector Fund, and Multi-Sector Fund will be liquidated.
(All of the foregoing transactions are sometimes referred to herein as the
Reorganization.) It is expected that the Reorganization will become effective
on or about June 26, 1998 (Closing Date). IF THE REORGANIZATION IS
CONSUMMATED, EACH MULTI-SECTOR FUND SHAREHOLDER WILL RECEIVE THE NUMBER OF
FULL AND FRACTIONAL CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE GROWTH
FUND (ROUNDED TO THE THIRD DECIMAL PLACE) EQUAL IN VALUE TO SUCH RESPECTIVE
SHAREHOLDER'S CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF MULTI-SECTOR
FUND AS OF THE CLOSING DATE.
For the reasons set forth below under "--Reasons for the Proposed
Reorganization" and "The Proposed Transaction--Reasons for the
Reorganization," the Board of Multi-Sector Fund, including those Directors who
are not "interested persons" (as that term is defined in the Investment
Company Act) of Multi-Sector Fund or Jennison Series Fund (Independent
Directors), has determined that the Reorganization is in the best interests of
Multi-Sector Fund and that the interests of the existing shareholders of
Multi-Sector Fund will not be diluted as a result of the Reorganization. The
Board of Jennison Series Fund, including the Independent Directors, similarly
has determined that the Reorganization is in the best interests of the Growth
Fund and that the interests of existing shareholders of the Growth Fund will
not be diluted as a result of the Reorganization. ACCORDINGLY, MULTI-SECTOR
FUND'S BOARD RECOMMENDS APPROVAL OF THE PLAN.
REASONS FOR THE PROPOSED REORGANIZATION
The Board of Multi-Sector Fund has concluded, based on information presented
by Multi-Sector Fund's manager, Prudential Investments Fund Management LLC
(PIFM), that the Reorganization is in the best interests of Multi-Sector Fund
and its shareholders. The following are among the reasons for the
Reorganization:
. MULTI-SECTOR FUND'S INVESTMENT PRACTICES ARE SIMILAR TO THOSE OF THE
GROWTH FUND'S. The Funds have identical investment objectives: long-term
growth of capital. Multi-Sector Fund has a secondary objective of current
income. Although the policies pursued by each Fund to achieve its investment
objective are different, Multi-Sector Fund's investment policies are
substantially similar to the investment policies of the Growth Fund. As of
March 13, 1998, more than 90% of Multi-Sector Fund was invested in conformity
with the investment policies of the Growth Fund.
. SHARES OF THE GROWTH FUND HAVE HAD LOWER EXPENSE RATIOS. For the fiscal
year ended April 30, 1997, Multi-Sector Fund shareholders bore annual total
operating expenses as a percentage of average net assets of 1.23%, 1.98%,
1.98% and .98% of the Class A, Class B, Class C and Class Z shares,
respectively. In contrast, the Growth Fund's annual total operating expenses
as a percentage of average net assets for Class A, Class B, Class C and Class
Z shares were 1.09%, 1.84%, 1.84% and .84%, respectively, for the fiscal year
ended September 30, 1997. Therefore, if shareholders of Multi-Sector Fund
approve the Reorganization, it is likely that they will be subject to lower
expense ratios as shareholders of the Growth Fund, although there can be no
assurance that this will continue.
. MULTI-SECTOR FUND AND THE GROWTH FUND HAVE MANY OF THE SAME SERVICE
PROVIDERS. PIFM serves as the manager of each Fund, Prudential Securities
Incorporated serves as their distributor, Prudential Mutual Fund Services LLC
is their transfer agent and dividend disbursing agent, and State Street Bank
and Trust Company is custodian for each of the Funds. The same individuals
serve on the Board of Directors of each Fund. David Poiesz, a Vice President
of The Prudential Investment Corporation and a director and Senior Vice
President of Jennison Associates LLC, currently is the portfolio manager of
both Funds.
3
<PAGE>
. THE GROWTH FUND'S PERFORMANCE HAS BEEN BETTER THAN MULTI-SECTOR FUND'S.
While past performance does not guarantee future results, the performance of
the Growth Fund has exceeded that of Multi-Sector Fund, as shown below (all
figures are as of February 28, 1998 and reflect reinvestment of dividends and
distributions and deduction of recurring fees):
<TABLE>
<CAPTION>
MULTI-SECTOR FUND
-------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
(INCEPTION (INCEPTION (INCEPTION (INCEPTION
6/29/90) 6/29/90) 8/1/94) 3/1/96)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURNS*
One Year........................... 15.14% 15.24% 19.24% 21.39%
Three Years........................ 16.45% 16.81% 17.54% --
Five Years......................... 14.66% 14.83% -- --
Since Inception.................... 12.86% 12.74% 14.63% 16.01%
CUMULATIVE TOTAL RETURNS**
One Year........................... 21.20% 20.24% 20.24% 21.39%
Three Years........................ 66.23% 62.41% 62.41% --
Five Years......................... 108.56% 100.60% -- --
Since Inception.................... 166.26% 150.80% 62.99% 34.51%
</TABLE>
<TABLE>
<CAPTION>
GROWTH FUND
-------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
(INCEPTION (INCEPTION (INCEPTION (INCEPTION
11/2/95) 11/2/95) 11/2/95) 4/15/96)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURNS*
One Year........................... 34.74% 35.77% 39.77% 42.19%
Since Inception.................... 22.03% 22.83% 23.81% 29.69%
CUMULATIVE TOTAL RETURNS**
One Year........................... 41.83% 40.77% 40.77% 42.19%
Since Inception.................... 67.22% 64.28% 64.28% 62.72%
</TABLE>
- --------
* With applicable sales charges.
** Without sales charges.
STRUCTURE OF THE FUNDS
Multi-Sector Fund is authorized to issue 2 billion shares of common stock,
$0.001 par value per share, divided into four classes designated Class A,
Class B, Class C and Class Z. Each class of shares of Multi-Sector Fund
represents an interest in the same assets of Multi-Sector Fund and is
identical in all respects except that (i) each class (with the exception of
Class Z shares) is subject to different sales charges and distribution and/or
service fees, which may affect performance, (ii) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to
its arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv)
only Class B shares have a conversion feature and (v) Class Z shares are
offered exclusively for sale to a limited group of investors.
Jennison Series Fund is authorized to issue 3 billion shares of common
stock, $0.001 par value per share, divided into three series. The Growth Fund
is authorized to issue 1 billion shares of common stock, $0.001 par value per
share. Each Jennison Series Fund series is divided into four classes
designated Class A, Class B, Class C and Class Z. There are 250 million
authorized shares allocated to each of the four classes of shares in each
series of Jennison Series Fund. Each class of shares represents an interest in
the same assets of the applicable series (including the Growth Fund) and is
identical in all respects except that (i) each class is subject to different
4
<PAGE>
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, (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. In accordance
with the Articles of Incorporation of Jennison Series Fund and Multi-Sector
Fund, respectively, each Board may authorize the creation of additional series
and classes within such series, with such preferences, privileges, limitations
and voting and dividend rights as the Board may determine.
The Boards of Jennison Series Fund and Multi-Sector Fund may increase or
decrease the number of authorized shares without shareholder approval. Shares
of each Fund, when issued, are fully paid, nonassessable, fully transferable
and redeemable at the option of the holder. Shares also are redeemable at the
option of each Fund under certain circumstances. Except for the conversion
feature applicable to Class B shares (which convert to Class A shares after
approximately seven years), there are no conversion, preemptive or other
subscription rights. In the event of liquidation of either Fund, each share
thereof is entitled to its portion of that Fund's assets (for the Growth Fund,
only as to the assets of the Growth Fund and not to the assets of Jennison
Series Fund) after all of its debts and expenses have been paid. Neither
Fund's shares have cumulative voting rights for the election of Directors.
INVESTMENT OBJECTIVES AND POLICIES
Multi-Sector Fund seeks to achieve long-term growth of capital, by investing
in domestic and foreign securities, primarily equity securities, of companies
in the following economic sectors: autos and housing, basic industry, business
services, consumer goods and services, defense and aerospace, energy,
environmental, financial services, health care, leisure, natural resources,
precious metals, public utilities, retailing, technology and transportation.
Multi-Sector Fund has a secondary investment objective of current income. The
Growth Fund has an investment objective of long-term growth of capital, which
it seeks to achieve by investing primarily in equity securities (common stock,
preferred stock and securities convertible into common stock) of established
companies with above-average growth prospects.
CERTAIN DIFFERENCES BETWEEN THE FUNDS
Although the investment objective of the Growth Fund is identical to that of
Multi-Sector Fund, the investment policies of each Fund differ in certain
respects. In addition, Multi-Sector pursues a secondary objective of current
income, and current income is only incidental for the Growth Fund. The
investment strategy employed by Multi-Sector Fund is based on the allocation
of assets among certain economic sectors within certain parameters. In
contrast, the investment strategy of the Growth Fund focuses on investments in
stocks of mid- and large capitalization issuers.
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 up to 35% of
its total assets in (i) equity securities of other companies that are
undergoing changes in management or product and marketing dynamics that have
not yet been reflected in reported earnings but that are expected to impact
earnings in the intermediate-term--these securities often lack investor
recognition and are often favorably valued, (ii) other equity-related
securities, (iii) equity securities of foreign issuers (with respect to 20% of
its total assets), (iv) obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, including mortgage-backed
securities and (v) investment grade fixed-income securities.
Under normal circumstances, at least 65% of Multi-Sector Fund's total assets
will be invested in equity securities (including domestic and foreign common
stock, convertible debt securities and warrants) of companies
5
<PAGE>
in up to seven economic sectors. Multi-Sector Fund may invest up to 35% of its
total assets in U.S. Government and foreign government securities and U.S. and
foreign corporate debt obligations, and Multi-Sector Fund is not otherwise
limited in its purchase of foreign securities. While the debt securities in
which Multi-Sector Fund may invest will primarily be rated A or better by
Moody's Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group
(S&P), the Fund also may invest up to 30% of its total assets in fixed-income
securities rated Baa or lower by Moody's or BBB or lower by S&P or in non-
rated securities of comparable quality. The Growth Fund may not invest in any
fixed-income securities rated lower than investment grade (i.e., lower than
Baa/BBB). See "Information About The Growth Fund" and "Information About
Multi-Sector Fund."
FEES AND EXPENSES
MANAGEMENT FEES. PIFM, the manager of Multi-Sector Fund, is compensated
pursuant to a management agreement with Multi-Sector Fund at an annual rate of
.65 of 1% of Multi-Sector Fund's average daily net assets. For the fiscal year
ended April 30, 1998, PIFM agreed to limit its management fee to no more than
.625 of 1% of the first $500 million of the average daily net assets of Multi-
Sector Fund, .55 of 1% of the next $500 million and .50 of 1% thereafter. For
the fiscal year ended April 30, 1998, Multi-Sector Fund paid management fees
of no more than .625% of the Fund's average daily net assets. PIFM, the
manager of the Growth Fund, is compensated pursuant to a management agreement
with Jennison Series Fund at an annual rate of .60 of 1% of the Growth Fund's
average daily net assets.
Under a subadvisory agreement between PIFM and The Prudential Investment
Corporation, doing business as Prudential Investments (Prudential
Investments), Prudential Investments manages the portfolio securities of
Multi-Sector Fund and is reimbursed by PIFM for its reasonable costs and
expenses in providing such services. Under a subadvisory agreement between
PIFM and Jennison Associates LLC (Jennison Associates), Jennison Associates
manages the portfolio securities of the Growth Fund and is compensated by PIFM
for its services at an annual rate of .30 of 1% of the Growth Fund's average
daily net assets up to and including $300 million and .25 of 1% of the Growth
Fund's average daily net assets in excess of $300 million. Under the terms of
each subadvisory agreement, the fee is computed daily and paid monthly. PIFM
continues to have responsibility for all investment advisory services pursuant
to its respective management agreements and supervises Prudential Investments'
and Jennison Associates' performance of their services.
Prudential Investments and Jennison Associates each are wholly-owned
subsidiaries of The Prudential Insurance Company of America (Prudential).
DISTRIBUTION FEES. Prudential Securities Incorporated (PSI or Prudential
Securities), One Seaport Plaza, New York, New York 10292, serves as the
distributor of Class A, Class B, Class C and Class Z shares of Multi-Sector
Fund and the Growth Fund. PSI is a wholly-owned subsidiary of Prudential and a
corporation organized under the laws of the State of Delaware. No distribution
or service fees are paid by Multi-Sector Fund's Class Z shares or by the
Growth Fund's Class Z shares.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by Multi-Sector
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), PSI incurs the expenses of
distributing Multi-Sector Fund's Class A, Class B and Class C shares. These
expenses include commissions and account servicing fees paid to, or on account
of, financial advisers of PSI and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions and account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions which have entered into agreements with PSI, advertising
expenses, the cost of printing and mailing prospectuses to potential investors
and indirect and overhead costs of PSI and Prusec associated with the sale of
Multi-Sector Fund shares, including lease, utility, communications and sales
promotion expenses.
6
<PAGE>
Under the Plans, Multi-Sector Fund is obligated to pay distribution and/or
service fees to PSI as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If PSI's
expenses exceed its distribution and service fees, Multi-Sector Fund will not
be obligated to pay any additional expenses. If PSI's expenses are less than
such distribution and service fees, it will retain its full fees and realize a
profit.
Under the Class A Plan, Multi-Sector Fund may pay PSI for its distribution-
related activities with respect to Class A shares at an annual rate of up to
.30 of 1% of the average daily net assets of the Class A shares. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance
of shareholder accounts (service fee) and (ii) total distribution fees
(including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. PSI 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 years ended
April 30, 1997 and 1998.
Under the Class B and Class C Plans, Multi-Sector Fund pays PSI for its
distribution-related activities with respect to Class B and Class C shares at
an annual rate of up to 1% of the average daily net assets of each of the
Class B and Class C shares. The Class B and Class C Plans provide for the
payment to PSI of (i) an asset-based sales charge of .75 of 1% of the average
daily net assets of each of the Class B and Class C shares and (ii) a service
fee of .25 of 1% of the average daily net assets of each of the Class B and
Class C shares. The service fee is used to pay for personal service and/or the
maintenance of shareholder accounts. PSI also receives contingent deferred
sales charges from certain redeeming shareholders.
Jennison Series Fund has entered into separate Distribution and Service
Plans for Class A, Class B and Class C shares of the Growth Fund, which are
virtually identical to the Multi-Sector Fund Plans. Similarly, the Jennison
Series Fund distribution agreement is virtually identical to the Multi-Sector
Fund Distribution Agreement. PSI has agreed to limit its distribution-related
fees payable under the Class A Plan to .25 of 1% of the average daily net
assets of the Growth Fund's Class A shares for the fiscal year ending
September 30, 1998.
OTHER EXPENSES. Each Fund also pays certain other expenses in connection
with its operation, including accounting, custodian, reports to shareholders,
legal, audit and share registration expenses.
EXPENSE RATIOS. 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
Multi-Sector Fund and the Growth Fund. Fee waivers and expense subsidies may
increase a Fund's yield and total return. Any fee waiver or subsidy may be
terminated at any time without notice, after which a Fund's expenses may
increase and its yield and total return may be reduced. Apart from the
agreement by PSI to limit its distribution-related fees payable under the
Class A Plan to .25 of 1% for the fiscal year ending September 30, 1998, it is
not anticipated that the Growth Fund's expenses will be subject to any fee
waiver or subsidy in the near future.
For the fiscal year ended April 30, 1997, total operating expenses stated as
a percentage of average net assets of Multi-Sector Fund for Class A, Class B,
Class C and Class Z shares were 1.23%, 1.98%, 1.98% and .98%, respectively,
and for the six months ended October 31, 1997, they were 1.19%, 1.94%, 1.94%
and .94% (each as annualized), respectively.
For the fiscal year ended September 30, 1997, total operating expenses
stated as a percentage of average net assets of the Growth Fund for Class A,
Class B, Class C and Class Z shares were 1.09%, 1.84%, 1.84% and .84%,
respectively.
Each Fund's shareholder transaction expenses are shown below and are
representative of the shareholder transaction expenses of the Growth Fund
following the Reorganization. Note that they are the same for the same class
of each Fund. THERE WILL NOT BE ANY SHAREHOLDER TRANSACTION FEE PAYABLE IN
CONNECTION WITH THE REORGANIZATION.
7
<PAGE>
<TABLE>
<CAPTION>
MULTI-SECTOR FUND AND THE GROWTH FUND
------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
SHARES SHARES SHARES SHARES
------- ------------------------- ---------------------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase None 5% during the first year, 1% on redemptions made None
price or redemption decreasing by 1% within one year of
proceeds, whichever is annually to 1% in the purchase.
lower)................ fifth and sixth years and
0% the seventh year.*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
</TABLE>
- --------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase.
To assist in understanding the various types of costs and expenses that an
investor will bear, set forth below is a comparison of Multi-Sector Fund's and
the Growth Fund's operating expenses based on, in the case of Multi-Sector
Fund, the fiscal year ended April 30, 1997 and, in the case of the Growth
Fund, the fiscal year ended September 30, 1997. The ratios also are shown on a
pro forma (estimated) combined basis as of September 30, 1997.
<TABLE>
<CAPTION>
ANNUAL FUND CLASS A SHARES CLASS B SHARES CLASS C SHARES
OPERATING EXPENSES -------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of MULTI- PRO MULTI- PRO MULTI- PRO
average net assets) SECTOR GROWTH FORMA SECTOR GROWTH FORMA SECTOR GROWTH FORMA
FUND FUND COMBINED FUND FUND COMBINED FUND FUND COMBINED
------ ------ -------- ------ ------ -------- ------ ------ --------
Management Fees......... .62%+ .60% .60% .62%+ .60% .60% .62%+ .60% .60%
12b-1 Fees (After
Reduction)............. .25++ .25++ .25++ 1.00 1.00 1.00 1.00 1.00 1.00
Other Expenses.......... .36 .24 .23 .36 .24 .23 .36 .24 .23
------ ------ -------- ------ ------ -------- ------ ------ --------
Total Fund Operating
Expenses (After
Reduction)............. 1.23% 1.09% 1.08% 1.98% 1.84% 1.83% 1.98% 1.84% 1.83%
====== ====== ======== ====== ====== ======== ====== ====== ========
<CAPTION>
ANNUAL FUND CLASS Z SHARES
OPERATING EXPENSES --------------------------
<S> <C> <C> <C>
(as a percentage of MULTI- PRO
average net assets) SECTOR GROWTH FORMA
FUND FUND COMBINED
-------- ------- ---------
Management Fees......... .62%+ .60% .60%
12b-1 Fees (After
Reduction)............. None None None
Other Expenses.......... .36 .24 .23
-------- ------- ---------
Total Fund Operating
Expenses (After
Reduction)............. .98% .84% .83%
======== ======= =========
</TABLE>
The example set forth below shows the expenses that an investor in the
combined fund (assuming approval by Multi-Sector Fund's shareholders) would
pay on a $1,000 investment, based upon the pro forma combined ratios set forth
above.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
EXAMPLE ---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption
at the end of each time period:
Class A................................................ $60 $83 $ 107 $175
Class B................................................ $69 $88 $ 109 $186
Class C................................................ $29 $58 $ 99 $215
Class Z................................................ $ 8 $26 $ 46 $103
You would pay the following expenses on the same invest-
ment, assuming no redemption:
Class A................................................ $60 $83 $ 107 $175
Class B................................................ $19 $58 $ 99 $186
Class C................................................ $19 $58 $ 99 $215
Class Z................................................ $ 8 $26 $ 46 $103
</TABLE>
8
<PAGE>
- --------
+ Although the Management Agreement provides that Multi-Sector Fund will pay a
management fee of .65 of 1% per annum of its average daily net assets, PIFM
agreed to limit is management fee to no more than .625 of 1% of the first
$500 million of the average daily net assets of the Fund, .55 of 1% of the
next $500 million and .50 of 1% thereafter for the fiscal year ended April
30, 1998.
++ Although each Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30% per annum of the average daily net
assets of the Class A shares, the Distributor agreed to limit its
distribution fees with respect to Class A shares so as not to exceed .25 of
1% of the average daily net assets of the Class A shares for the fiscal
years ended April 30, 1997 and 1998 (for Multi-Sector Fund) and September
30, 1997 and 1998 (for the Growth Fund). Total Fund Operating Expenses
absent this limitation with respect to Class A shares would be 1.28% for
Multi-Sector Fund and 1.14% for the Growth Fund.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose
of this table is to assist an investor in understanding the various types of
costs and expenses that an investor in Multi-Sector Fund and the Growth Fund
will bear, whether directly or indirectly.
PURCHASE OF SHARES
Investors may purchase shares of the Funds through Prudential Securities,
Prusec or directly from the Funds, through PMFS. The purchase price is the net
asset value (NAV) next determined following receipt of an order by PMFS or PSI
plus a sales charge which, at the investor's option, may be imposed either (i)
at the time of purchase (Class A shares) or (ii) on a deferred basis (Class B
or Class C shares). Class Z shares are offered to a limited group of investors
without any sales charge. No sales charges will be imposed in connection with
the Reorganization. The information provided below applies to each Fund.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000........ 5.00% 5.26% 4.75%
$25,000 to $49,999....... 4.50 4.71 4.25
$50,000 to $99,999....... 4.00 4.17 3.75
$100,000 to $249,999..... 3.25 3.36 3.00
$250,000 to $499,999..... 2.50 2.56 2.40
$500,000 to $999,999..... 2.00 2.04 1.90
$1,000,000 and above..... None None None
</TABLE>
PSI may reallow the entire initial sales charge to dealers. Selling dealers
may be deemed to be underwriters, as that term is defined in the Securities
Act of 1933, as amended (Securities Act).
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), PIFM, PMFS or one of their affiliates will pay dealers,
financial advisers and other persons that distribute shares a finders' fee
from its own resources based on a percentage of the net asset value of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of each
Fund and shares of other mutual funds for which PIFM serves
9
<PAGE>
as manager or administrator (Prudential Mutual Funds) (excluding money market
funds other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code of 1986, as
amended (Internal Revenue Code) and deferred compensation and annuity plans
under Sections 457 and 403(b)(7) of the Internal Revenue Code (collectively,
Benefit Plans), provided that the Benefit Plan has existing assets of at least
$1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
250 eligible employees or participants. In the case of Benefit Plans whose
accounts are held directly with PMFS or Prudential Securities and for which
PMFS or Prudential Securities does individual account recordkeeping (Direct
Account Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries
(PSI or Subsidiary Prototype Benefit Plans), Class A shares may be purchased
at NAV by participants who are repaying loans made from such plans to the
participant.
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential serves as the
plan administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the 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 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 used by a plan sponsor, shares of Prudential
Mutual Funds and shares of certain unaffiliated mutual funds that participate
in the PruArray or SmartPath Program. "Existing assets" also include monies
invested in The Guaranteed Interest Account (GIA), a group annuity insurance
product issued by Prudential, and units of The Stable Value Fund (SVF), an
unaffiliated bank collective fund. Class A shares may also be purchased at NAV
by plans that have monies invested in GIA and SVF, provided (i) the purchase
is made with the proceeds of a redemption from either GIA or SVF and (ii)
Class A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are
members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at net asset value
without regard to the assets or number of participants in the individual
employer's qualified plan(s) or non-qualified plans so long as the employers
in the Association (i) have retirement plan assets in the aggregate of at
least $1 million or 250 participants in the aggregate and (ii) maintain their
accounts with the Fund's Transfer Agent.
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at NAV by Individual Retirement Accounts and Savings Accumulation
Plans of the company's employees. The Program is available only to (i)
employees who open an IRA or Savings Accumulation Plan account with the Fund's
transfer agent and (ii) spouses of employees who open an IRA account with the
Fund's transfer agent. The Program is offered to companies that have at least
250 eligible employees.
10
<PAGE>
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including each 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. Investors must notify the Transfer Agent either directly or
through Prudential Securities or Prusec that they are entitled to the
reduction or waiver of the sales charge. The reduction or waiver will be
granted subject to confirmation of an investor's entitlement. No initial sales
charges are imposed upon Class A shares purchased upon the reinvestment of
dividends and distributions.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class
B and Class C shares may be subject to a contingent deferred sales charge
(CDSC). PSI will pay sales commissions from its own resources 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. This facilitates the
ability of each Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. PSI anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC
and the distribution fee. In connection with the sale of Class C shares, PSI
will pay, from its own resources, dealers, financial advisers and other
persons that distribute Class C shares a commission of up to 1% of the
purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares are currently available for purchase by (i) pension, profit-
sharing or other employee benefit plans qualified under Section 401 of the
Internal Revenue Code, deferred compensation and annuity plans under Sections
457 and 403(b)(7) of the Internal Revenue Code, and non-qualified plans for
which either Fund is an available option (collectively, Benefit Plans),
provided that such Benefit Plans (in combination with other plans sponsored by
the same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants in any fee-based program or
trust program sponsored by Prudential Securities, The Prudential Savings Bank,
F.S.B. or any affiliate which includes mutual funds as investment options and
for which either Fund is an available option; (iii) certain participants in
the MEDLEY Program (group variable annuity
11
<PAGE>
contracts) sponsored by Prudential for whom Class Z shares of the Prudential
Mutual Funds are an available investment option; (iv) Benefit Plans for which
Prudential Retirement Services serves as recordkeeper and as of September 20,
1996, (a) were Class Z shareholders of the Prudential Mutual Funds, or (b)
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds; (v) current and former Directors/Trustees of the Prudential
Mutual Funds (including either Fund); and (vi) employees of Prudential and/or
Prudential Securities who participate in a Prudential-sponsored employee
savings plan. After a Benefit Plan qualifies to purchase Class Z shares, all
subsequent purchases will be for Class Z shares. There are no sales charges
associated with the purchase or redemption of Class Z shares.
REDEMPTIONS--HOW TO SELL YOUR SHARES
Shares of each Fund may be redeemed at any time for cash at the NAV next
determined after the redemption request is received in proper form by PMFS or
Prudential Securities. In certain cases, however,
redemption proceeds will be reduced by the amount of any applicable contingent
deferred sales charge, as described below.
Redemption of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to the investor. The CDSC will be imposed on any redemption which reduces the
current value of the investor's Class B or Class C shares to an amount which
is lower than the amount of all payments by the investor for shares during the
preceding six years, in the case of Class B shares, and one year, in the case
of Class C shares. A CDSC will be applied on the lesser of the original
purchase price or the current value of the shares being redeemed. Increases in
the value of an investor's shares or shares acquired through reinvestment of
dividends or distributions are not subject to a CDSC. The amount of any
contingent deferred sales charge will be paid to and retained by PSI.
The CDSC will be waived in the case of a redemption following the death or
disability of a shareholder or, in the case of a trust account, following the
death or disability of the grantor. The waiver is available for total or
partial redemptions of shares owned by a person, either individually or in
joint tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of
an excess contribution or plan distributions following the death or disability
of the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC
was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans
12
<PAGE>
made from the account to the participant and from which a CDSC was previously
deducted. In addition, the CDSC will be waived on redemptions of shares held
by a Director of either Fund.
An investor must notify PMFS either directly or through Prudential
Securities or Prusec, at the time of redemption, that he or she is entitled to
waiver of the CDSC and provide PMFS with such supporting documentation as it
may deem appropriate. The waiver will be granted subject to confirmation of
the investor's entitlement.
The CDSC will be waived on redemptions of Class C shares from qualified and
non-qualified retirement and deferred compensation plans that participate in
the 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 Funds track amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in the investor's account (ii)
multiplied by the total number of Class B shares purchased and then held in
the investor's account. Each time any Eligible Shares in the investor's
account convert to Class A shares, all shares or amounts representing Class B
shares then in the investor's account that were acquired through the automatic
reinvestment of dividends and other distributions will convert to Class A
shares. Since annual distribution related fees are lower for Class A shares
than Class B shares, the per share net asset value of the Class A shares may
be higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, the investor may receive
fewer Class A shares than Class B shares converted.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (ii) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Funds will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
EXCHANGE PRIVILEGES
Shareholders of each Fund have an exchange privilege with certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject to the minimum investment requirements of such funds. Class A, Class
B, Class C and Class Z shares of each Fund may be exchanged for Class A, Class
B, Class C and Class Z shares, respectively, of another Prudential Mutual Fund
on the basis of their relative net asset value. No sales charge will be
imposed at the time of the exchange. Any CDSC payable upon the redemption of
shares exchanged will be calculated from the first day of the month after the
initial purchase, excluding the time
13
<PAGE>
shares were held in the money market fund. Class B and Class C shares may not
be exchanged into money market funds other than Prudential Special Money
Market Fund, Inc.
A special exchange privilege is available for shareholders who qualify to
purchase Class A shares at NAV and for shareholders who qualify to purchase
Class Z shares. Under this exchange privilege, amounts representing any Class
B and Class C shares (which are not subject to a CDSC) held in such a
shareholder's account will be automatically exchanged for Class A shares for
shareholders who qualify to purchase Class A shares at NAV on a quarterly
basis, unless the shareholder elects otherwise. Similarly, shareholders who
qualify to purchase Class Z shares, will have their Class B and Class C shares
which are not subject to a CDSC and their Class A shares exchanged for Class Z
shares on a quarterly basis. Eligibility for this exchange privilege will be
calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total
amount of payments for the purchase of Class B or Class C shares and (3)
amounts representing Class B or Class C shares held beyond the applicable CDSC
period. Class B and Class C shareholders 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 either of the Funds is an
available option will have their Class A shares, if any, exchanged for Class Z
shares when they join the program. Upon leaving the program (whether
voluntarily or not), such Class Z shares (and, to the extent provided for in
the program, Class Z shares acquired through participation in the program)
will be exchanged for Class A shares at net asset value.
An exchange of shares of either Fund for shares of another Prudential Mutual
Fund is treated as a redemption of Fund shares and purchase of the other
fund's shares for tax purposes. Each Fund's exchange privilege is not a right
and may be suspended, modified or terminated at any time on sixty days'
notice.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Growth Fund and Multi-Sector Fund currently distribute semi-annually to
their shareholders dividends from all of their respective net investment
income and make distributions of any net capital gains at least annually.
Shareholders of Multi-Sector Fund and the Growth Fund receive dividends and
other distributions in additional shares of the Funds, unless shareholders
elect in writing not less than five business days prior to the record date to
receive dividends and other distributions in cash. Dividends paid by the
Growth Fund and Multi-Sector Fund with respect to each class of their
respective shares, to the extent any are paid, will be calculated in the same
manner, at the same time, on the same day, and will be in the same amount,
except that each class will bear its own distribution expenses, generally
resulting in lower dividends for Class B and Class C shares. Distributions of
net capital gains, if any, will be paid in the same amount for each class of
the Growth Fund's or Multi-Sector Fund's shares.
FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED REORGANIZATION
Multi-Sector Fund and Jennison Series Fund have received an opinion of
Gardner, Carton & Douglas to the effect that the proposed Reorganization will
constitute a tax-free reorganization within the meaning of section
368(a)(1)(C) of the Internal Revenue Code. Accordingly, no gain or loss will
be recognized to either Fund on the transfer to the Growth Fund of all of
Multi-Sector Fund's assets and the assumption of all of its liabilities, if
any, or to shareholders of Multi-Sector Fund on their receipt of shares of the
Growth Fund. The tax basis for
14
<PAGE>
such shares to be received by a Multi-Sector Fund shareholder will be the same
as the shareholder's tax basis for the shares of Multi-Sector Fund to be
constructively surrendered in exchange therefor. In addition, the holding
period of the Growth Fund shares to be received by a shareholder pursuant to
the Reorganization will include the period during which the shares of Multi-
Sector Fund to be constructively surrendered in exchange therefor were held,
provided the latter shares were held as capital assets by the shareholder on
the date of the Reorganization. See "The Proposed Transaction--Federal Income
Tax Considerations" below.
PRINCIPAL RISK FACTORS
Because the Funds' investment objectives are identical, the Funds will be
subject, in many instances, to similar investment risks. Below is a summary of
these risks.
FOREIGN SECURITIES
The Growth Fund may invest up to 20% of its total assets in foreign equity
securities. Multi-Sector is not limited in its purchase of foreign securities,
which may include equity and debt securities, including foreign government
securities.
Investment in foreign securities involves additional risks and
considerations not typically associated with investing in U.S. Government
securities and domestic issuers. Investments in obligations of foreign issuers
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. In addition, there may be less publicly
available information about foreign issuers than about domestic issuers and
foreign issuers are generally not subject to the same accounting, auditing and
financial recordkeeping standards and requirements as domestic issuers. In the
event of a default with respect to any foreign debt obligations, it may be
more difficult for a Fund to obtain or enforce a judgment against the issuer
of such securities.
HIGH YIELD SECURITIES
The Growth Fund may invest up to 35% of its total assets in investment grade
fixed-income securities rated Baa or higher by Moody's, BBB or higher by S&P
or in non-rated securities of comparable quality. Multi-Sector Fund may invest
up to 35% of its total assets in U.S. and foreign government and corporate
debt obligations, with 30% of its total assets in fixed-income securities
rated Baa or lower by Moody's or BBB or lower by S&P or in non-rated
securities of comparable quality. Securities rated Baa by Moody's have
speculative characteristics and changes in economic conditions or other
circumstances could lead to a weakened capacity to make principal and interest
payments. Securities rated BB or lower by S&P or Ba or lower by Moody's,
commonly known as "junk bonds," are generally considered to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal.
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 and the market perception of the creditworthiness of the issuer
(market risk). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions.
15
<PAGE>
HEDGING AND RETURN ENHANCEMENT ACTIVITIES
Each Fund may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies include the purchase and sale of call options
on stocks and stock indices and, for the Growth Fund, on foreign currencies.
Multi-Sector Fund may purchase (but not write) put options on stocks and stock
indices, and the Growth Fund may purchase and write put options on stocks,
stock indices and foreign currencies. Each Fund may purchase and write futures
contracts and related options (for Multi-Sector, on interest-bearing
securities, interest rate indices and stock indices and, for the Growth Fund,
on stock indices and foreign currencies). Each Fund may also use forward
foreign exchange contracts for hedging purposes. Each 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. The investment adviser of each Fund believes that there is no
appreciable difference in risks between the Funds' hedging and return
enhancement activities.
Participation in the options and futures markets involves investment risks
and transaction costs to which a Fund would not be subject absent the use of
these strategies. Each Fund, and thus its investors, may lose money through
any unsuccessful use of these strategies. If the investment adviser's
prediction of movements in the direction of the securities markets or interest
rates is inaccurate, the adverse consequences to a Fund may leave the Fund in
a worse position than if such strategies were not used. Risks inherent in the
use of options and futures 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 and securities prices; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities 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 a Fund to purchase or sell
a portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for a Fund to sell the security at a disadvantageous
time, due to the requirement that each Fund maintain "cover" or segregate
securities in connection with hedging transactions.
SHORT SALES
Each Fund may sell a security it does not own in anticipation of a decline
in the market value of that security (short sales), except that the Growth
Fund has no current intention of doing so. Generally, to complete such a
transaction, the Fund may borrow the security to make delivery to the buyer.
The Fund then is obligated to replace the security borrowed by purchasing it
at market price at the time of replacement. The price at such time may be more
or less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay to the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would increase
the cost of the security sold. The proceeds of the short sale will be retained
by the broker, to the extent necessary to meet margin requirements, until the
short position is closed out. Until the Fund replaces a borrowed security, the
Fund will segregate cash, U.S. Government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily, at such a level
that (i) the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current value of the security sold
short and (ii) the amount segregated plus the amount deposited with the broker
as collateral will not be less than the market value of the security at the
time it was sold short. The Fund will incur a loss as a result of the short
sale if the price of the security increases between the date of the short sale
and the date on which the Fund replaces the borrowed security. The Fund will
realize a gain if the security declines in price between those dates. This
result is the opposite of what one would expect from a cash purchase of a long
position in a security. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to
16
<PAGE>
pay in connection with a short sale. No more than 25% of each Fund's net
assets will be, when added together, (i) deposited as collateral for the
obligation to replace securities borrowed to effect short sales, and (ii)
segregated in connection with short sales.
BORROWING
Each Fund may borrow up to 20% of the value of its total assets (computed at
the time the loan is made) for temporary, extraordinary or emergency purposes
or for the clearance of transactions and Multi-Sector Fund also may borrow to
take advantage of investment opportunities. Each Fund may pledge up to 20% of
its total assets to secure such borrowings. If a Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. If a Fund borrows to invest in securities, any investment gains
made on the securities in excess of interest paid on the borrowing will cause
the net asset value of the shares to rise faster than would otherwise be the
case. On the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any interest paid on
the money borrowed) to the Fund, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative
factor known as "leverage."
REALIGNMENT OF INVESTMENT PORTFOLIO
The investment adviser of the Growth Fund anticipates selling certain
securities in the investment portfolio of the combined Fund following the
consummation of the Reorganization. The investment adviser of the Growth Fund
expects that these sales of securities acquired from Multi-Sector Fund and the
purchase of other securities may affect the aggregate amount of taxable gains
and losses generated by the Growth Fund.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
The terms and conditions under which the Reorganization may be consummated
are set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan, a copy of which is attached as Appendix A to this Prospectus and Proxy
Statement.
The Plan contemplates (i) the Growth Fund acquiring all of the assets of
Multi-Sector Fund in exchange solely for Class A, Class B, Class C and Class Z
shares of the Growth Fund and the assumption by the Growth Fund of all of
Multi-Sector Fund's liabilities, if any, as of the Closing Date, (ii) the
constructive distribution on the Closing Date of such Class A, Class B, Class
C and Class Z shares to the Class A, Class B, Class C and Class Z
shareholders, respectively, of Multi-Sector Fund and (iii) the liquidation of
Multi-Sector Fund.
The assets of Multi-Sector Fund to be acquired by the Growth Fund shall
include, without limitation, all cash, cash equivalents, securities,
receivables (including interest and dividends receivable), claims and rights
of action, rights to register shares under applicable securities laws, books
and records, deferred and prepaid expenses shown as assets on Multi-Sector
Fund's books, and other property owned by Multi-Sector Fund on the Closing
Date. The Growth Fund will assume from Multi-Sector Fund all debts,
liabilities, obligations and duties of whatever kind or nature. In exchange
for the transfer by Multi-Sector Fund of these assets to the Growth Fund and
the assumption of these liabilities, the Growth Fund will issue and deliver to
Multi-Sector Fund full and
17
<PAGE>
fractional shares equal in number to the number of full and fractional shares
of Multi-Sector Fund then outstanding.
As soon as practicable after the Closing Date, Multi-Sector Fund will
distribute pro rata to its shareholders of record, determined as of the close
of business on the Closing Date, the Class A, Class B, Class C and Class Z
shares of the Growth Fund received by Multi-Sector Fund in exchange for such
shareholders' shares of Multi-Sector Fund. Such distribution will be
accomplished by opening accounts on the books of the Growth Fund in the names
of the Multi-Sector Fund shareholders and by transferring thereto Class A,
Class B, Class C and Class Z shares of the Growth Fund previously credited to
the account of Multi-Sector Fund on those books. Each shareholder account
shall be credited with the respective pro rata number of the Growth Fund Class
A, Class B, Class C and Class Z shares due to the shareholder in whose name
the account is established. Fractional shares of the Growth Fund will be
rounded to the third decimal place.
Accordingly, every shareholder of Multi-Sector Fund will own Class A, Class
B, Class C and Class Z shares of the Growth Fund immediately after the
Reorganization that, except for rounding, will be equal in value to the total
value of that shareholder's full and fractional Class A, Class B, Class C and
Class Z shares of Multi-Sector Fund immediately prior to the Reorganization.
Thus, the Reorganization will not result in a dilution of the value of any
shareholder account.
Any transfer taxes payable upon issuance of shares of the Growth Fund in a
name other than that of the registered holder of the shares constructively
exchanged therefor shall be paid by the person to whom such Growth Fund shares
are to be issued, as a condition of such transfer.
The consummation of the Reorganization is subject to a number of conditions
set forth in the Plan, some of which may be waived by either Fund. The Plan
may be terminated and the Reorganization abandoned at any time prior to the
Closing Date, before or after approval by the shareholders of Multi-Sector
Fund. In addition, the Plan may be amended in any mutually agreeable manner,
except that no amendment may be made subsequent to the Meeting that would
detrimentally affect the value of the Growth Fund shares to be distributed.
REASONS FOR THE REORGANIZATION
The Board of Multi-Sector Fund, including a majority of the Independent
Directors, has determined that the interests of Multi-Sector Fund shareholders
will not be diluted as a result of the Reorganization and that the
Reorganization is in the best interests of Multi-Sector Fund. In addition, the
Board of Jennison Series Fund, including a majority of the Independent
Directors, has determined that the interests of the Growth Fund shareholders
will not be diluted as a result of the Reorganization and that the
Reorganization is in the best interests of the Growth Fund. Each Board is
comprised of the same individuals.
The reasons for the proposed Reorganization are summarized above under
"Synopsis--Reasons for the Proposed Reorganization." The Boards of Jennison
Series Fund and Multi-Sector Fund based their decisions to approve the Plan on
an inquiry into a number of factors, including the following:
(1) the compatibility of the investment objective, policies and
restrictions of each Fund;
(2) the relative past and current growth in assets and investment
performance and future prospects of each Fund;
(3) the effect of the Reorganization on the expense ratios of the Growth
Fund;
18
<PAGE>
(4) the costs of the Reorganization, which will be paid for by Multi-
Sector Fund and the Growth Fund in proportion to their respective asset
levels;
(5) the tax-free nature of the Reorganization to each Fund and its
shareholders;
(6) the potential benefits to the shareholders of Multi-Sector Fund, who
will have the opportunity to invest in a Fund with similar investment
policies, but with a history of better performance and lower expense
ratios; and
(7) the potential benefits to the Growth Fund, which will have the
opportunity to further increase its assets and acquire securities
consistent with its investment objective and policies.
If the Plan is not approved by the Multi-Sector Fund shareholders, the
Multi-Sector Fund Board may consider other appropriate action, such as a
merger or other business combination with an investment company other than the
Growth Fund.
DESCRIPTION OF SECURITIES TO BE ISSUED
Class A, Class B, Class C and Class Z shares of the Growth Fund will be
issued to Multi-Sector Fund shareholders on the Closing Date. Jennison Series
Fund is authorized to issue 3 billion shares of common stock, $.001 par value
per share, divided into three series, Prudential Active Balanced Fund,
Prudential Jennison Growth & Income Fund and the Growth Fund. The Growth Fund
is authorized to issue 250 million shares each of Class A, Class B, Class C
and Class Z common stock. Each Class A, Class B, Class C and Class Z share
will represent an equal and proportionate interest in the same assets of the
Growth Fund. For further discussion of the Growth Fund's shares, see
"Synopsis--Structure of the Funds" above.
FEDERAL INCOME TAX CONSIDERATIONS
Multi-Sector Fund and Jennison Series Fund have received an opinion from
Gardner, Carton & Douglas, which opinion is based on representations made by
each Fund, to the effect that (1) the Reorganization will constitute a
reorganization within the meaning of section 368(a)(1)(C) of the Internal
Revenue Code; (2) a Multi-Sector Fund shareholder will recognize no gain or
loss as a result of the receipt of Class A, Class B, Class C or Class Z shares
of the Growth Fund solely in exchange for Class A, Class B, Class C or Class Z
shares of Multi-Sector Fund pursuant to the Reorganization (Internal Revenue
Code section 354(a)(1)) and the liquidation of Multi-Sector Fund; (3) no gain
or loss will be recognized by Multi-Sector Fund as a result of the transfer of
its assets to the Growth Fund in exchange solely for Class A, Class B, Class C
and Class Z shares of the Growth Fund, the assumption by the Growth Fund of
Multi-Sector Fund's liabilities, if any, and the subsequent distribution of
the Growth Fund shares to Multi-Sector Fund's shareholders in liquidation
thereof (Internal Revenue Code sections 361(a), 361(c)(1), 361(c)(4) and
357(a)); (4) no gain or loss will be recognized by the Growth Fund on the
acquisition of such assets in exchange solely for the Growth Fund's Class A,
Class B, Class C and Class Z shares and its assumption of Multi-Sector Fund's
liabilities, if any (Internal Revenue Code section 1032(a)); (5) the Growth
Fund's basis in the assets to be received pursuant to the Reorganization will
be the same as the basis thereof in Multi-Sector Fund's hands immediately
before the Reorganization, and the Growth Fund's holding period for those
assets will include Multi-Sector Fund's holding period therefor (Internal
Revenue Code sections 362(b) and 1223(2)); (6) a Multi-Sector Fund
shareholder's basis in the Class A, Class B, Class C and Class Z shares of the
Growth Fund to be received by him pursuant to the Reorganization will be the
same as his basis in the Class A, Class B, Class C and Class Z shares of
Multi-Sector Fund to be constructively surrendered in exchange therefor
(Internal Revenue Code section 358(a)(1)); and (7) the holding period of the
Class A, Class B, Class C and Class Z shares of the Growth Fund to be received
by a shareholder of Multi-Sector Fund pursuant to the Reorganization will
include the period during which the Class A, Class B,
19
<PAGE>
Class C and Class Z shares of Multi-Sector Fund to be constructively
surrendered in exchange therefor were held, provided the latter shares were
held as capital assets by the shareholder on the date of the Reorganization
(Internal Revenue Code section 1223(1)). It should be noted that no ruling has
been sought by the IRS and that an opinion of counsel is not binding on the
IRS or any court. If the IRS were to successfully assert that the proposed
transaction is taxable, then the proposed transaction would be treated as a
taxable sale of Multi-Sector Fund's assets to the Growth Fund followed by the
taxable liquidation of Multi-Sector Fund, and shareholders of Multi-Sector
Fund would recognize gain or loss as a result of such transaction.
Shareholders of Multi-Sector Fund should consult their tax advisers
regarding the effect, if any, of the Reorganization in light of their
individual circumstances. Because the foregoing discussion only relates to the
federal income tax consequences of the Reorganization, those shareholders also
should consult their tax advisers as to state and local tax consequences, if
any, of the Reorganization.
CERTAIN COMPARATIVE INFORMATION ABOUT JENNISON SERIES FUND AND MULTI-SECTOR
FUND
ORGANIZATION. Jennison Series Fund and Multi-Sector Fund is each a Maryland
corporation, and the rights of their shareholders are governed by their
respective Articles of Incorporation, By-Laws and applicable Maryland law.
CAPITALIZATION. Jennison Series Fund is authorized to issue 3 billion shares
of common stock, par value $.001 per share, divided into three series. The
Growth Fund is authorized to issue 1 billion shares of common stock, par value
$.001 per share. The shares are divided into four classes, designated Class A,
Class B, Class C and Class Z, each consisting of 250 million authorized
shares. Multi-Sector Fund is authorized to issue 2 billion shares of common
stock, par value $.001 per share. Multi-Sector Fund also offers four classes
of shares, designated Class A, Class B, Class C and Class Z.
In addition, the Board of Jennison Series Fund may authorize an increase in
the number of authorized shares and each Board may reclassify unissued shares
to authorize additional classes of shares having terms and rights determined
by the respective Board without shareholder approval.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Fund is required
to hold annual meetings of its shareholders. Each Fund is required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of a Director when requested in writing to do so by the holders of at least
10% of the Fund's outstanding shares entitled to vote. In addition, each Fund
is required to call a meeting of shareholders for the purpose of electing
Directors if, at any time, less than a majority of the Directors holding
office was elected by shareholders.
Shareholders of the Growth Fund and of Multi-Sector Fund are entitled to one
vote for each share on all matters submitted to a vote of their shareholders,
respectively, under Maryland law. Under each Fund's Articles of Incorporation,
approval of certain matters, such as an amendment to the Articles of
Incorporation, merger, consolidation or transfer of all or substantially all
assets, or a dissolution generally requires the affirmative vote of a majority
of the outstanding shares of common stock of the Fund.
Jennison Series Fund's By-Laws and Multi-Sector Fund's By-Laws each provide
that the presence in person or by proxy of the holders of record of one-third
of the shares of the Fund's common stock issued and outstanding and entitled
to vote shall constitute a quorum at a shareholders' meeting, except as
otherwise provided in the Articles of Incorporation.
20
<PAGE>
SHAREHOLDER LIABILITY. Under Maryland law, shareholders of Multi-Sector Fund
and of Jennison Series Fund have no personal liability as such for Multi-
Sector Fund's and Jennison Series Fund's acts or obligations, respectively.
LIABILITY AND INDEMNIFICATION OF DIRECTORS. Under Jennison Series Fund's
Articles of Incorporation and Maryland law, a Director or officer of the Fund
is not liable to Jennison Series Fund or its shareholders for monetary damages
for breach of fiduciary duty as a Director or officer except to the extent
such exemption from liability or limitation thereof is not permitted by law,
including the Investment Company Act. The same is true for Directors of Multi-
Sector Fund, under its Articles of Incorporation and Maryland law.
Under the Investment Company Act, a Director may not be protected against
liability to a Fund and its security holders to which he or she would
otherwise be subject as a result of his or her willful misfeasance, bad faith
or gross negligence in the performance of his or her duties, or by reason of
reckless disregard of his or her obligations and duties. The staff of the SEC
interprets the Investment Company Act to require additional limits on
indemnification of Directors and officers.
The foregoing is only a summary of certain comparative information about
Multi-Sector Fund and Jennison Series Fund and their respective Articles of
Incorporation and By-Laws.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of Multi-Sector Fund and the
Growth Fund as of September 30, 1997 and the pro forma combined capitalization
as if the Reorganization had occurred on that date.
<TABLE>
<CAPTION>
MULTI-SECTOR PRO FORMA
FUND GROWTH FUND COMBINED
------------ ----------- ---------
<S> <C> <C> <C>
Net Assets (000)
Class A.................................... $281,098 $145,022 $426,120
Class B.................................... $166,161 $419,405 $585,566
Class C.................................... $ 4,651 $ 25,134 $ 29,785
Class Z.................................... $ 17,373 $609,869 $627,242
Net Asset Value per share
Class A.................................... $ 16.41 $ 15.39 $ 15.39
Class B.................................... $ 15.91 $ 15.18 $ 15.18
Class C.................................... $ 15.90 $ 15.18 $ 15.18
Class Z.................................... $ 16.46 $ 15.45 $ 15.45
Shares Outstanding (000)
Class A.................................... 17,126 9,421 27,688
Class B.................................... 10,447 27,625 38,575
Class C.................................... 292 1,656 1,962
Class Z.................................... 1,056 39,478 40,598
</TABLE>
21
<PAGE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets (based upon weighted
average shares outstanding during the relevant period) of Multi-Sector Fund
for the six months ended October 31, 1997 (annualized) and of the Growth Fund
for the fiscal year ended September 30, 1997. The ratios also are shown on a
pro forma combined basis as of September 30, 1997.
<TABLE>
<CAPTION>
MULTI-SECTOR PRO FORMA
FUND GROWTH FUND COMBINED
------------ ----------- ---------
<S> <C> <C> <C>
Ratio of expenses to average net assets
Class A................................... 1.19% 1.09% 1.08%
Class B................................... 1.94% 1.84% 1.83%
Class C................................... 1.94% 1.84% 1.83%
Class Z................................... .94% .84% .83%
Ratio of net investment income to average
net assets
Class A................................... (.18)% (.25)% (.24)%
Class B................................... (.85)% (1.00)% (.99)%
Class C................................... (.89)% (1.00)% (.99)%
Class Z................................... .13% -- % .01%
</TABLE>
22
<PAGE>
INFORMATION ABOUT THE GROWTH FUND
FINANCIAL INFORMATION
For financial information for the Growth Fund, see "Financial Highlights" in
the Prospectus for the Growth Fund and the other series of Jennison Series
Fund (Jennison Series Fund's Prospectus) and the Annual Report to Shareholders
for the Growth Fund for the fiscal year ended September 30, 1997, which is
available without charge upon request to Jennison Series Fund. See "Additional
Information" below.
GENERAL
For a discussion of the organization, classification and sub-classification
of the Growth Fund, see "General Information" and "Fund Highlights--Growth
Fund" in Jennison Series Fund's Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of the Growth Fund's investment objective and policies and
risk factors associated with an investment in the Growth Fund, see "How the
Funds Invest" in Jennison Series Fund's Prospectus.
BOARD OF DIRECTORS
For a discussion of the responsibilities of Jennison Series Fund's Board of
Directors, see "How the Funds are Managed" in Jennison Series Fund's
Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of the Growth Fund's Manager, subadviser and portfolio
managers, distributor and transfer agent, see "How the Funds are Managed" in
Jennison Series Fund's Prospectus.
PORTFOLIO TRANSACTIONS
For a discussion of the Growth Fund's policy with respect to brokerage, see
"How the Funds are Managed-- Portfolio Transactions" in Jennison Series Fund's
Prospectus.
PERFORMANCE
For a discussion of the Growth Fund's performance during the fiscal year
ended September 30, 1997, see Appendix B hereto and the Annual Report to
Shareholders for the fiscal year ended September 30, 1997, which is available
without charge upon request to Jennison Series Fund. See "Additional
Information" below.
GROWTH FUND'S SHARES
For a discussion of the Growth Fund's shares, including voting rights and
the exchange privilege, and how the shares may be purchased and redeemed, see
"Shareholder Guide" and "General Information" in Jennison Series Fund's
Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of the Growth Fund's shares is
determined, see "How Each Fund Values it Shares" in Jennison Series Fund's
Prospectus.
23
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of the Growth Fund's policy with respect to dividends and
distributions and the tax consequences of an investment in its shares, see
"Taxes, Dividends and Distributions" in Jennison Series Fund's Prospectus.
ADDITIONAL INFORMATION
Additional information concerning the Growth Fund is incorporated herein by
reference from Jennison Series Fund's current Prospectus dated January 23,
1998, a copy of which accompanies this Prospectus/Proxy Statement. Copies of
the Growth Fund's Annual Report to Shareholders for the fiscal year ended
September 30, 1997 are available without charge upon oral or written request
to Jennison Series Fund. To obtain another copy of Jennison Series Fund's
Prospectus or the Growth Fund's Annual Report, call (800) 225-1852 or write to
Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey
08837. Shareholder inquiries should be addressed to Jennison Series Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102, or by
telephone at (800) 225-1852 (toll free) or from outside the U.S.A. at (908)
417-7555 (collect).
24
<PAGE>
INFORMATION ABOUT MULTI-SECTOR FUND
FINANCIAL INFORMATION
For financial information about Multi-Sector Fund, see "Financial
Highlights" in Multi-Sector Fund's Prospectus and its Annual Report to
Shareholders for the fiscal year ended April 30, 1997 and its Semi-Annual
Report to Shareholders for the six months ended October 31, 1997, which are
available without charge upon request to Multi-Sector Fund. See "Additional
Information" below.
GENERAL
For a discussion of the organization, classification and sub-classification
of Multi-Sector Fund, see "General Information" and "Fund Highlights" in the
Multi-Sector Fund Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
For a discussion of Multi-Sector Fund's investment objectives and policies
and of risk factors associated with an investment in Multi-Sector Fund, see
"How the Fund Invests" in the Multi-Sector Fund Prospectus.
BOARD OF DIRECTORS
For a discussion of the responsibilities of Multi-Sector Fund's Board, see
"How the Fund is Managed" in the Multi-Sector Fund Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Multi-Sector Fund's Manager and subadviser and portfolio
manager, distributor and transfer agent, see "How the Fund is Managed" in the
Multi-Sector Fund Prospectus.
PORTFOLIO TRANSACTIONS
For a discussion of Multi-Sector Fund's policy with respect to brokerage,
see "How the Fund is Managed--Portfolio Transactions" in the Multi-Sector Fund
Prospectus.
PERFORMANCE
For a discussion of Multi-Sector Fund's performance during the fiscal year
ended April 30, 1997 and the six months ended October 31, 1997, see Appendix B
hereto and the Annual Report to Shareholders for the fiscal year ended April
30, 1997 and the Semi-Annual Report to Shareholders for the six months ended
October 31, 1997, which are available without charge upon request to Multi-
Sector Fund. See "Additional Information" below.
MULTI-SECTOR FUND'S SHARES
For a discussion of Multi-Sector Fund's shares, including voting rights and
the exchange privilege and how the shares may be purchased and redeemed, see
"General Information" and "Shareholder Guide" in the Multi-Sector Fund
Prospectus.
25
<PAGE>
NET ASSET VALUE
For a discussion of how the offering price of Multi-Sector Fund shares is
determined, see "How the Fund Values its Shares" in the Multi-Sector Fund
Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of Multi-Sector Fund's policy with respect to dividends and
distributions and the tax consequences of an investment in its shares, see
"Taxes, Dividends and Distributions" in the Multi-Sector Fund Prospectus.
ADDITIONAL INFORMATION
Additional information concerning Multi-Sector Fund is incorporated herein
by reference from Multi-Sector Fund's current Prospectus dated June 30, 1997,
as supplemented on September 8, 1997 and January 2, 1998. Copies of Multi-
Sector Fund's Prospectus and Multi-Sector Fund's Annual Report to Shareholders
for the fiscal year ended April 30, 1997 and Multi-Sector Fund's Semi-Annual
Report to Shareholders for the six months ended October 31, 1997 are available
without charge upon oral or written request to Multi-Sector Fund. To obtain
Multi-Sector Fund's Prospectus or Annual or Semi-Annual Report, call (800)
225-1852 or write to Prudential Mutual Fund Services LLC, Raritan Plaza One,
Edison, New Jersey 08837. Shareholder inquiries should be addressed to Multi-
Sector 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).
Multi-Sector Fund and the Growth Fund are each subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and the
Investment Company Act and in accordance therewith file reports and other
information with the SEC. Reports and other information filed by Multi-Sector
Fund and the Growth Fund can be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices in New York (7 World
Trade Center, Suite 1300, New York, New York 10048) and Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511).
Copies of such material also can be obtained at prescribed rates from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
VOTING INFORMATION
A majority of the shares of Multi-Sector Fund outstanding on May 1, 1998,
represented in person or by proxy, must be present for the transaction of
business at the Meeting. In the event that a quorum is not present at the
Meeting, or if a quorum is present but sufficient votes to approve the
proposal are not received, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of Proxies.
Any such adjournment will require the affirmative vote of a majority of those
shares present at the Meeting or represented by proxy. When voting on a
proposed adjournment, the persons named as proxies will vote all shares that
they are entitled to vote for the proposed adjournment, unless directed to
disapprove the proposal, in which case such shares will be voted against the
proposed adjournment. Any questions as to an adjournment of the Meeting will
be voted on by the persons named in the enclosed Proxy in the same manner that
the Proxies are instructed to be voted. In the event that the Meeting is
adjourned, the same procedures will apply at a later Meeting date.
26
<PAGE>
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified on a
Proxy, the shares represented thereby will be voted for the proposal. A Proxy
may be revoked at any time prior to the time it is voted by written notice to
the Secretary of Multi-Sector Fund or by attendance at the Meeting. If a Proxy
that is properly executed and returned accompanied by instructions to withhold
authority to vote (an abstention) represents a broker "non-vote" (that is, a
Proxy from a broker or nominee indicating that such person has not received
instructions from the beneficial owner or other person entitled to vote shares
on a particular matter with respect to which the broker or nominee does not
have discretionary power), the shares represented thereby will be considered
not to be present at the Meeting for purposes of determining the existence of
a quorum for the transaction of business and be deemed not cast. Also, a
properly executed and returned Proxy marked with an abstention will be
considered present at the Meeting for purposes of determining the existence of
a quorum for the transaction of business. However, abstentions and broker
"non-votes" do not constitute a vote "for" or "against" the matter, but have
the effect of a negative vote on matters which require approval by a requisite
percentage of the outstanding shares.
Approval of the Plan requires the affirmative vote of a majority of the
outstanding shares of common stock of Multi-Sector Fund.
The close of business on May 1, 1998, has been fixed as the record date for
the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, Multi-Sector Fund had 30,142,216 shares outstanding and
entitled to vote. Each outstanding full share of Multi-Sector Fund will be
entitled to one vote at the Meeting, and each outstanding fractional share of
Multi-Sector Fund will be entitled to a proportionate fractional part of one
vote. As of May 1, 1998, the Directors and officers of Multi-Sector Fund, as a
group, owned less than 1% of the outstanding shares of Multi-Sector Fund and
the Directors and officers of Jennison Series Fund, as a group, owned less
than 1% of the outstanding shares of the Growth Fund. Prudential intends to
vote any shares for which it has direct voting authority FOR the proposed
Reorganization.
The expenses of the Reorganization and the solicitation of proxies will be
borne by Multi-Sector Fund and the Growth Fund in proportion to their
respective assets and will include reimbursement of brokerage firms and others
for expenses in forwarding proxy solicitation material to the shareholders of
Multi-Sector Fund. Shareholder Communications Corporation, a proxy
solicitation firm, has been retained to assist in the solicitation of Proxies
for the Meeting. The fees and expenses of Shareholder Communications
Corporation are not expected to exceed $55,000, excluding mailing and printing
costs. The solicitation of proxies will be largely by mail but may include
telephonic, telegraphic or oral communication by regular employees of
Prudential Securities and its affiliates, including PIFM. This cost also will
be borne by Multi-Sector Fund and the Growth Fund in proportion to their
respective assets.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
Multi-Sector Fund arise, including any question as to an adjournment of the
Meeting, the persons named in the enclosed Proxy will vote thereon according
to their best judgment in the interests of Multi-Sector Fund, taking into
account all relevant circumstances.
27
<PAGE>
SHAREHOLDERS' PROPOSALS
Any Multi-Sector Fund shareholder proposal intended to be presented at any
subsequent meeting of the shareholders of Multi-Sector Fund must be received
by Multi-Sector Fund a reasonable time before the Board's solicitation
relating to such meeting is made in order to be included in Multi-Sector
Fund's Proxy Statement and form of Proxy relating to that meeting. In the
event that the Plan is approved at this Meeting, it is not expected that there
will be any future shareholder meetings of Multi-Sector Fund.
It is the present intent of the Boards of Multi-Sector Fund and Jennison
Series Fund not to hold annual meetings of shareholders unless the election of
Directors is required under the Investment Company Act nor hold special
meetings of shareholders unless required by the Investment Company Act or
state law.
S. Jane Rose
Secretary
Dated: May 12, 1998
28
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the 12th day of May, 1998, by and between Prudential Multi-Sector Fund, Inc.
(Acquiree Fund) and Prudential Jennison Growth Fund, a series of Prudential
Jennison Series Fund, Inc. (Acquiror Fund) (collectively, the Funds and each
individually, a Fund). Prudential Multi-Sector Fund, Inc. and Prudential
Jennison Series Fund, Inc. (Jennison Series Fund) are Maryland corporations
and maintain their principal place of business at Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102. Each Fund's shares are divided into
four classes: Class A, Class B, Class C and Class Z shares.
This Agreement is intended to be, and is adopted as, a plan of a
reorganization pursuant to section 368(a)(1)(C) of the Internal Revenue Code
of 1986, as amended (Internal Revenue Code). The reorganization will comprise
the transfer of all of the assets of Acquiree Fund in exchange solely for the
Class A, Class B, Class C and Class Z shares of Acquiror Fund and Acquiror
Fund's assumption of all of Acquiree Fund's liabilities, if any, and the
constructive distribution, after the Closing Date hereinafter referred to, of
such shares of Acquiror Fund to the shareholders of Acquiree Fund in
liquidation of Acquiree Fund as provided herein, all upon the terms and
conditions as hereinafter set forth. (The foregoing transactions are referred
to herein as the Reorganization.)
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF ACQUIREE FUND IN EXCHANGE FOR CLASS A, CLASS B,
CLASS C AND CLASS Z SHARES OF ACQUIROR FUND AND ASSUMPTION OF LIABILITIES, IF
ANY, AND LIQUIDATION OF ACQUIREE FUND.
1.1. Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, Acquiree Fund
agrees to sell, assign, transfer and deliver its assets, as set forth in
paragraph 1.2, to Acquiror Fund, and Acquiror Fund agrees (a) to issue and
deliver to Acquiree Fund in exchange therefor the number of Class A, Class
B, Class C and Class Z shares of Acquiror Fund determined by dividing the
net asset value allocable to Class A, Class B, Class C and Class Z shares,
respectively, of Acquiree Fund (computed in the manner and as of the time
and date set forth in paragraph 2.1) by the net asset value of a Class A,
Class B, Class C and Class Z share of Acquiror Fund (rounded to the third
decimal place) (computed in the manner and as of the time and date set
forth in paragraph 2.2); and (b) to assume all of Acquiree Fund's
liabilities, if any, as set forth in paragraph 1.3. Such transactions shall
take place at the closing provided for in paragraph 3 (Closing).
1.2. The assets of Acquiree Fund to be acquired by Acquiror Fund shall
include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other
property of any kind owned by Acquiree Fund and any deferred and prepaid
expenses shown as assets on the books of Acquiree Fund on the closing date
provided in paragraph 3.1 (Closing Date).
1.3. Acquiror Fund will assume from Acquiree Fund all debts, liabilities,
obligations and duties of Acquiree Fund of whatever kind or nature, whether
absolute, accrued, contingent or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable as of the Closing
Date, and whether or not specifically referred to in this Agreement;
provided, however, that Acquiree Fund agrees to utilize its best efforts to
discharge all of its known debts, liabilities, obligations and duties prior
to the Closing Date.
A-1
<PAGE>
1.4. On or immediately prior to the Closing Date, Acquiree Fund will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in
any event not less than ninety-eight percent) of its investment company
taxable income (computed without regard to any deduction for dividends
paid), and realized net capital gains, if any, for all taxable years
through the Closing Date so as to retain its qualification as a regulated
investment company pursuant to section 851 of the Internal Revenue Code.
1.5. On a date (Liquidation Date), as soon after the Closing Date as is
conveniently practicable, Acquiree Fund will distribute pro rata to its
shareholders of record, determined as of the close of business on the
Closing Date, the shares of Acquiror Fund received by Acquiree Fund
pursuant to paragraph 1.1 in exchange for their interest in Acquiree Fund.
Such distribution will be accomplished by opening accounts on the books of
Acquiror Fund in the names of Acquiree Fund shareholders and transferring
thereto the shares credited to the account of Acquiree Fund on the books of
Acquiror Fund. Each such shareholder account shall be credited with the
respective pro rata number of Acquiror Fund shares due the shareholder in
whose name the account is established. Fractional shares of Acquiror Fund
shall be rounded to the third decimal place.
1.6. Acquiror Fund shall not issue certificates representing its shares
in connection with such exchange. With respect to any Acquiree Fund
shareholder holding Acquiree Fund stock certificates as of the Closing
Date, until Acquiror Fund is notified by the Acquiree Fund transfer agent
that such shareholder has surrendered his or her outstanding Acquiree Fund
stock certificates or, in the event of lost, stolen or destroyed stock
certificates, posted adequate bond or submitted a lost certificate form, as
the case may be, Acquiror Fund will not permit such shareholder to (1)
receive dividends or other distributions on Acquiror Fund shares in cash
(although such dividends and distributions shall be credited to the account
of such shareholder established on Acquiror Fund's books pursuant to
paragraph 1.5, as provided in the next sentence), (2) exchange Acquiror
Fund shares credited to such shareholder's account for shares of other
Prudential Mutual Funds, or (3) pledge or redeem such shares. In the event
that a shareholder is not permitted to receive dividends or other
distributions on Acquiror Fund shares in cash as provided in the preceding
sentence, Acquiror Fund shall pay such dividends or other distributions in
additional Acquiror Fund shares, notwithstanding any election such
shareholder shall have made previously with respect to the payment of
dividends or other distributions on shares of Acquiree Fund. Acquiree Fund
will, at its expense, request its shareholders to surrender their
outstanding Acquiree Fund stock certificates, post adequate bond or submit
a lost certificate form, as the case may be.
1.7. Ownership of Acquiror Fund shares will be shown on the books of
Jennison Series Fund's transfer agent. Shares of Acquiror Fund will be
issued in the manner described in Jennison Series Fund's then-current
prospectus and statement of additional information.
1.8. Any transfer taxes payable upon issuance of shares of Acquiror Fund
in a name other than the registered holder of the shares on the books of
Acquiree Fund as of the time of transfer thereof shall be paid by the
person to whom such shares are to be issued as a condition to the
registration of such transfer.
1.9. Any reporting responsibility with the Securities and Exchange
Commission (SEC) or any state securities commission of Acquiree Fund is and
shall remain the responsibility of Acquiree Fund up to and including the
Liquidation Date.
1.10. All books and records of Acquiree Fund, including all books and
records required to be maintained under the Investment Company Act of 1940
(Investment Company Act) and the rules and regulations thereunder, shall be
available to Acquiror Fund from and after the Closing Date and shall be
turned over to Acquiror Fund on or prior to the Liquidation Date.
A-2
<PAGE>
1.11. On or about the Closing Date, Acquiree Fund shall file Articles of
Transfer with the State Department of Assessment and Taxation of the State
of Maryland, and as soon as reasonably practicable after the Closing Date,
Acquiree Fund shall file Articles of Dissolution with the State Department
of Assessment and Taxation of the State of Maryland, and any further
actions shall be taken in connection therewith as required by applicable
law.
2. VALUATION
2.1. The value of Acquiree Fund's assets and liabilities to be acquired
and assumed, respectively, by Acquiror Fund shall be the net asset value of
Acquiree Fund computed as of 4:15 p.m., New York time, on the Closing Date
(such time and date being hereinafter called the Valuation Time), using the
valuation procedures set forth in Acquiree Fund's then-current prospectus
and statement of additional information.
2.2. The net asset value of each Class A, Class B, Class C and Class Z
share of Acquiror Fund shall be the net asset value per such share computed
on a class-by-class basis as of the Valuation Time, using the valuation
procedures set forth in Jennison Series Fund's then-current prospectus and
statement of additional information.
2.3. The number of Acquiror Fund shares to be issued (including
fractional shares, if any) in exchange for Acquiree Fund's net assets shall
be calculated as set forth in paragraph 1.1.
2.4. All computations of net asset value shall be made by or under the
direction of Prudential Investments Fund Management LLC (PIFM) in
accordance with its regular practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1. Except as provided in paragraph 3.3, the date of the closing shall
be June 26, 1998, or such later date as the parties may agree (Closing
Date). All acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Acquiror Fund or
at such other place as the parties may agree.
3.2. State Street Bank and Trust Company (State Street), as custodian for
Acquiree Fund, shall deliver to Acquiror Fund a certificate of an
authorized officer of State Street stating that (a) Acquiree Fund's
portfolio securities, cash and any other assets have been transferred in
proper form to Acquiror Fund on the Closing Date and (b) all necessary
taxes, if any, have been paid, or provision for payment has been made, in
conjunction with the transfer of portfolio securities.
3.3. In the event that immediately prior to the Valuation Time (a) the
New York Stock Exchange (NYSE) or other primary exchange is closed to
trading (other than prior to, or following the close of, trading on such
exchange on a regular business day) or trading thereon is restricted or (b)
trading or the reporting of trading on the NYSE or other primary exchange
or elsewhere is disrupted so that accurate appraisal of the value of the
net assets of Acquiree Fund and of the net asset value per share of
Acquiror Fund is impracticable, the Closing Date shall be postponed until
the first business day after the date when such trading shall have been
fully resumed and such reporting shall have been restored.
3.4. Acquiree Fund shall deliver to Acquiror Fund on or prior to the
Liquidation Date the names and addresses of Acquiree Fund's shareholders
and the number of outstanding shares owned by each such shareholder, all as
of the close of business on the Closing Date, certified by the Transfer
Agent of the Fund. Acquiror Fund shall issue and deliver at the Closing a
confirmation or other evidence satisfactory to Acquiree Fund that shares of
Acquiror Fund have been or will be credited to Acquiree Fund's account on
A-3
<PAGE>
the books of Acquiror Fund. At the Closing each party shall deliver to the
other such bills of sale, checks, assignments, share certificates, receipts
and other documents as such other party or its counsel may reasonably
request to effect the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Acquiree Fund represents and warrants as follows:
4.1.1. No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Acquiree Fund or any of
its properties or assets, except as previously disclosed in writing to
Acquiror Fund. Acquiree Fund knows of no facts that might form the
basis for the institution of such litigation, proceedings or
investigation, and Acquiree Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
4.1.2. The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of Acquiree Fund at April 30, 1997 and
for the year then ended have been audited by Price Waterhouse LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Acquiree Fund as of
and for the period ended on such date, and there are no material known
liabilities of Acquiree Fund (contingent or otherwise) not disclosed
therein;
4.1.3. Since April 30, 1997, there has not been any material adverse
change in Acquiree Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of
business, or any incurrence by Acquiree Fund of indebtedness maturing
more than one year from the date such indebtedness was incurred, except
as otherwise disclosed to and accepted by Acquiror Fund. For the
purposes of this paragraph 4.1.3, a decline in net asset value or a
decrease in the number of shares outstanding shall not constitute a
material adverse change;
4.1.4. At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Acquiree Fund required by law to have
been filed on or before such dates shall have been timely filed, and
all federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been made
for the payment thereof, and, to the best of Acquiree Fund's knowledge,
all federal or other taxes required to be shown on any such return or
report have been shown on such return or report, no such return is
currently under audit and no assessment has been asserted with respect
to such returns;
4.1.5. Acquiree Fund is a "fund" as defined in section 851(h)(2) of
the Internal Revenue Code; for each past taxable year since it
commenced operations, Acquiree Fund (a) has met the requirements of
Subchapter M of the Internal Revenue Code for qualification and
treatment as a regulated investment company and will meet those
requirements for the current taxable year and (b) has made such
distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax
imposed; and Acquiree Fund has no earnings and profits accumulated in
any taxable year in which the provisions of Subchapter M of the
Internal Revenue Code did not apply to it. Acquiree Fund's assets shall
be invested at all times through the Closing Date in a manner that
ensures compliance with the foregoing;
A-4
<PAGE>
4.1.6. All issued and outstanding shares of Acquiree Fund are, and at
the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Acquiree Fund will, at the time of the Closing, be held in
the names of the persons and in the amounts set forth in the list of
shareholders submitted to Allocation Fund in accordance with the
provisions of paragraph 3.4. Acquiree Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any
of its shares, nor is there outstanding any security convertible into
any of its shares, except for the Class B shares that have the
conversion feature described in Acquiree Fund's current prospectus;
4.1.7. At the Closing Date, Acquiree Fund will have good and
marketable title to its assets to be transferred to Acquiror Fund
pursuant to paragraph 1.1 and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment
for such assets, Acquiror Fund will acquire good and marketable title
thereto;
4.1.8. The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of Acquiree Fund and by
all necessary corporate action, other than shareholder approval, on the
part of Acquiree Fund, and this Agreement constitutes a valid and
binding obligation of Acquiree Fund, enforceable in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
relating to or affecting creditors' rights and by general principles of
equity. At the Closing Date, the performance of this Agreement shall
have been duly authorized by all necessary action by Acquiree Fund's
shareholders;
4.1.9. The information furnished and to be furnished by Acquiree Fund
for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with
the transaction contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and
4.1.10. On the effective date of the registration statement filed
with the SEC by Jennison Series Fund on Form N-14 relating to the
shares of Acquiror Fund issuable thereunder, and any supplement or
amendment thereto (Registration Statement), at the time of the meeting
of the shareholders of Acquiree Fund and on the Closing Date, the Proxy
Statement of Acquiree Fund and the Prospectus of Acquiror Fund and each
other document to be included in the Registration Statement
(collectively, Proxy Statement):
(a) will comply in all material respects with the provisions of the
Securities Act of 1933, as amended (1933 Act), the Securities Exchange
Act of 1934, as amended (1934 Act) and the Investment Company Act and
the rules and regulations thereunder, and
(b) will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.10 shall not apply
to statements in or omissions from the Proxy Statement made in reliance
upon and in conformity with information furnished by Acquiror Fund for
use therein.
A-5
<PAGE>
4.2. Acquiror Fund represents and warrants as follows:
4.2.1. No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Jennison Series Fund or
any of its properties or assets, except as previously disclosed in
writing to Acquiree Fund. Jennison Series Fund knows of no facts that
might form the basis for the institution of such litigation, proceeding
or investigation, and Jennison Series Fund is not a party to or subject
to the provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
4.2.2. The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of Acquiror Fund at September 30, 1997
and for the fiscal year then ended have been audited by Price
Waterhouse LLP, independent accountants, in accordance with generally
accepted auditing standards. Such financial statements are prepared in
accordance with generally accepted accounting principles and present
fairly, in all material respects, the financial condition, results of
operations, changes in net assets and financial highlights of Acquiror
Fund as of and for the period ended on such date, and there are no
material known liabilities of Acquiror Fund (contingent or otherwise)
not disclosed therein;
4.2.3. Since September 30, 1997, there has not been any material
adverse change in Acquiror Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Acquiror Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by Acquiree
Fund. For the purposes of this paragraph 4.2.3, a decline in net asset
value or a decrease in the number of shares outstanding shall not
constitute a material adverse change;
4.2.4. At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Acquiror Fund required by law to have
been filed on or before such dates shall have been timely filed, and
all federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been made
for the payment thereof, and, to the best of Acquiror Fund's knowledge,
all federal or other taxes required to be shown on any such return or
report are shown on such return or report, no such return is currently
under audit and no assessment has been asserted with respect to such
returns;
4.2.5. Acquiror Fund is a "fund" as defined in section 851(h)(2) of
the Internal Revenue Code; for each past taxable year since it
commenced operations, Acquiror Fund (a) has met the requirements of
Subchapter M of the Internal Revenue Code for qualification and
treatment as a regulated investment company and will meet those
requirements for the current taxable year and (b) has made such
distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax
imposed; and Acquiror Fund has no earnings and profits accumulated in
any taxable year in which the provisions of Subchapter M of the
Internal Revenue Code did not apply to it. Acquiror Fund's assets shall
be invested at all times through the Closing Date in a manner that
ensures compliance with the foregoing;
4.2.6. All issued and outstanding shares of Acquiror Fund are, and at
the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by
this Agreement, Acquiror Fund does not have outstanding any options,
warrants or
A-6
<PAGE>
other rights to subscribe for or purchase any of its shares, nor is
there outstanding any security convertible into any of its shares
except for the Class B shares that have the conversion feature
described in Jennison Series Fund's current prospectus;
4.2.7. The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of Jennison Series Fund
and by all necessary corporate action on the part of Acquiror Fund, and
this Agreement constitutes a valid and binding obligation of Acquiror
Fund, enforceable in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.8. The shares of Acquiror Fund to be issued and delivered to
Acquiree Fund pursuant to this Agreement will, at the Closing Date,
have been duly authorized and, when issued and delivered as provided in
this Agreement, will be duly and validly issued and outstanding shares
of Acquiror Fund, fully paid and non-assessable, and no shareholder of
Jennison Series Fund has any pre-emptive right to subscribe therefor or
purchase such shares;
4.2.9. The information furnished and to be furnished by Acquiree Fund
for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with
the transaction contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and
4.2.10. On the effective date of the Registration Statement, at the
time of the meeting of the shareholders of Acquiree Fund and on the
Closing Date, the Proxy Statement:
(a) will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the Investment Company Act and the rules and
regulations thereunder, and
(b) will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.2.10 shall not apply
to statements in or omissions from the Proxy Statement made in reliance
upon and in conformity with information furnished by Acquiree Fund for
use therein.
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing Date, it being
understood that the ordinary course of business will include declaring and
paying customary dividends and other distributions and such changes in
operations as are contemplated by the normal operations of the Funds,
except as may otherwise be required by paragraph 1.4 hereof; provided that
Acquiree Fund shall not dispose of more than an insignificant portion of
its historic business assets during such period without Acquiror Fund's
prior consent.
5.2. Acquiree Fund covenants to call a meeting of Acquiree Fund's
shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated hereby
(including the determinations of Acquiree Fund's Board of Directors as set
forth in Rule 17a-8(a) under the Investment Company Act).
A-7
<PAGE>
5.3. Acquiree Fund covenants that Acquiror Fund shares to be received by
Acquiree Fund in accordance herewith are not being acquired for the purpose
of making any distribution thereof other than in accordance with the terms
of this Agreement.
5.4. Acquiree Fund covenants that it will assist Acquiror Fund in
obtaining such information as Acquiror Fund reasonably requests concerning
the beneficial ownership of Acquiree Fund's shares.
5.5. Subject to the provisions of this Agreement, each Fund will take, or
cause to be taken, all action, and will do, or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make effective
the transactions contemplated by this Agreement.
5.6. Acquiree Fund covenants to prepare the Proxy Statement in compliance
with the 1934 Act, the Investment Company Act and the rules and regulations
under each such Act.
5.7. Acquiree Fund covenants that it will, from time to time, execute and
deliver or cause to be executed and delivered all such assignments and
other instruments, and will take or cause to be taken such further action,
as Acquiror Fund may deem necessary or desirable in order to vest in and
confirm to Acquiror Fund title to and possession of all the assets of
Acquiree Fund to be sold, assigned, transferred and delivered hereunder and
otherwise to carry out the intent and purpose of this Agreement.
5.8. Acquiror Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of Jennison Series Fund's Board
of Directors as set forth in Rule 17a-8(a) thereunder) and such of the
state Blue Sky or securities laws as it may deem appropriate in order to
continue its operations after the Closing Date.
5.9. Acquiror Fund covenants that it will, from time to time, as and when
requested by Acquiree Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take and
cause to be taken such further action, as Acquiree Fund may deem necessary
or desirable in order to (a) vest in and confirm to Acquiree Fund title to
and possession of all the shares of Acquiror Fund to be transferred to
Acquiree Fund pursuant to this Agreement and (b) assume all of Acquiree
Fund's liabilities in accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIREE FUND
The obligations of Acquiree Fund to consummate the transactions provided for
herein shall be subject to the performance by Acquiror Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
6.1. All representations and warranties of Acquiror Fund contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.
6.2. Jennison Series Fund shall have delivered to Acquiree Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Jennison Series Fund, in form and substance satisfactory to
Acquiree Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Acquiror Fund in this Agreement are true
and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other
matters as Acquiree Fund shall reasonably request.
A-8
<PAGE>
6.3. Acquiree Fund shall have received on the Closing Date a favorable
opinion from Piper & Marbury LLP, special counsel to Jennison Series Fund,
dated as of the Closing Date, to the effect that:
6.3.1. Jennison Series Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland, with power
under its Articles of Incorporation to own all of its properties and
assets and, to the knowledge of such counsel, to carry on its business
as described in its prospectus, and Acquiror Fund has been duly
established in accordance with the terms of Jennison Series Fund's
Articles of Incorporation;
6.3.2. This Agreement has been duly authorized for execution and
delivery by an authorized officer of Acquiror Fund and, assuming due
authorization, execution and delivery of this Agreement by Acquiree
Fund, constitutes a valid and binding obligation of Acquiror Fund
enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to
general principles of equity (regardless of whether enforcement is
sought in a proceeding at law or in equity), provided that such counsel
may state that they express no opinion as to the validity or
enforceability of any provision regarding choice of New York law to
govern this Agreement;
6.3.3. The shares of Acquiror Fund to be distributed to Acquiree Fund
shareholders under this Agreement, assuming their due authorization and
delivery as contemplated by this Agreement, will be validly issued and
outstanding and fully paid and non-assessable, and no shareholder of
Acquiror Fund has any pre-emptive right to subscribe therefor or
purchase such shares;
6.3.4. The execution and delivery of this Agreement by Jennison
Series Fund did not, and the performance by Acquiror Fund of its
obligations hereunder will not, (a) violate Jennison Series Fund's
Articles of Incorporation or By-Laws or (b) result in a default or a
breach of (i) the Management Agreement dated October 27, 1995 between
Jennison Series Fund and PIFM, (ii) the Custodian Agreement dated
August 24, 1995 between Jennison Series Fund and State Street, (iii)
the Restated Distribution Agreement dated August 27, 1997 between
Jennison Series Fund and Prudential Securities Incorporated and (iv)
the Transfer Agency and Service Agreement dated October 27, 1995
between Jennison Series Fund and Prudential Mutual Fund Services, Inc.;
provided, however, that such counsel may state that they express no
opinion with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; provided further that
insofar as performance by Acquiror Fund of its obligations under this
Agreement is concerned, such counsel may state that they express no
opinion as to bankruptcy, insolvency, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles;
6.3.5. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, filing
or order of any court or governmental authority is required for the
consummation by Acquiror Fund of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934 Act and
the Investment Company Act and such as may be required under state Blue
Sky or securities laws;
6.3.6. Jennison Series Fund is registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted by the SEC to suspend such
registration; and
A-9
<PAGE>
6.3.7. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no material litigation or administrative
proceeding or investigation of or before any court or governmental body
is presently pending or threatened against Jennison Series Fund or any
of its properties or assets distributable or allocable to Acquiror
Fund, and (b) Acquiror Fund is not a party to or subject to the
provision of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business, except as
otherwise disclosed in its Registration Statement on Form N-1A.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Jennison Series Fund and certificates
of public officials. In rendering such opinion, such counsel also may (a) make
assumptions regarding the authenticity, genuineness and/or conformity of
documents and copies thereof without independent verification thereof, (b)
limit such opinion to applicable federal and state law and (c) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with
such firm who have devoted substantive attention to matters directly related
to this Agreement and the Reorganization.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIROR FUND
The obligations of Acquiror Fund to complete the transactions provided for
herein shall be subject to the performance by Acquiree Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
7.1. All representations and warranties of Acquiree Fund contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.
7.2. Acquiree Fund shall have delivered to Acquiror Fund on the Closing
Date a statement of Acquiree Fund's assets and liabilities, which statement
shall be prepared in accordance with generally accepted accounting
principles consistently applied, together with a list of Acquiree Fund's
portfolio securities showing the adjusted tax bases of such securities by
lot, as of the Closing Date, certified by the Treasurer or Assistant
Treasurer of Acquiree Fund.
7.3. Acquiree Fund shall have delivered to Acquiror Fund on the Closing
Date a certificate executed in its name by the President or a Vice
President of Acquiree Fund, in form and substance satisfactory to Acquiror
Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Acquiree Fund made in this Agreement are
true and correct at and as of the Closing Date except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as Acquiror Fund shall reasonably request.
7.4. On or immediately prior to the Closing Date, Acquiree Fund shall
have declared and paid to its shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially
all (and in any event not less than ninety-eight percent) of its investment
company taxable income (computed without regard to any deduction for
dividends paid), and realized net capital gain, if any, for all taxable
years through its liquidation.
7.5. Acquiror Fund shall have received on the Closing Date a favorable
opinion from Gardner, Carton & Douglas, counsel to Acquiree Fund, dated as
of the Closing Date, to the effect that:
A-10
<PAGE>
7.5.1. Acquiree Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland, with power under its
Articles of Incorporation to own all of its properties and assets and,
to the knowledge of such counsel, to carry on its business as described
in its prospectus;
7.5.2. This Agreement has been duly authorized for execution and
delivery by an authorized officer of Acquiree Fund and, assuming due
authorization, execution and delivery of this Agreement by Acquiror
Fund, constitutes a valid and binding obligation of Acquiree Fund
enforceable against Acquiree Fund in accordance with its terms, except
to the extent that enforcement thereof may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors'
rights and to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity), provided
that such counsel may state that they express no opinion as to the
validity or enforceability of any provision regarding choice of New
York law to govern this Agreement;
7.5.3. The execution and delivery of the Agreement by Acquiree Fund
did not, and the performance by Acquiree Fund of its obligations
hereunder will not, (a) violate Acquiree Fund's Articles of
Incorporation or By-Laws or (b) result in a default or a breach of (i)
the Management Agreement dated June 1, 1990 between Acquiree Fund and
PIFM, (ii) the Custodian Agreement dated May 17, 1990 between Acquiree
Fund and State Street, (iii) the Restated Distribution Agreement dated
May 8, 1996 between Acquiree Fund and Prudential Securities
Incorporated, and (iv) the Transfer Agency and Service Agreement dated
June 1, 1990 between Acquiree Fund and Prudential Mutual Fund Services,
Inc.; provided, however, that such counsel may state that they express
no opinion with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; provided further that
insofar as performance by Acquiree Fund of its obligations under this
Agreement is concerned, such counsel may state that they express no
opinion as to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
7.5.4. To counsel's knowledge, all regulatory consents,
authorizations and approvals required to be obtained by Acquiree Fund
under Maryland law for the consummation of the transactions
contemplated by this Agreement (other than such as may be required
under Maryland securities laws or Blue Sky laws, as to which such
counsel may state that they express no opinion) have been obtained;
7.5.5. To counsel's knowledge, Acquiree Fund is registered with the
SEC as an investment company, and, to the knowledge of such counsel, no
order has been issued or proceeding instituted by the SEC to suspend
such registration; and
7.5.6. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no material litigation or administrative
proceeding or investigation of or before any court or governmental body
is presently pending or threatened against Acquiree Fund or any of its
properties or assets and (b) Acquiree Fund is not a party to or subject
to the provision of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business,
except as otherwise disclosed in its Registration Statement on Form N-
1A.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Multi-Sector Fund and certificates of
public officials. As to matters of Maryland law, such counsel may rely upon
opinions of Maryland counsel, in which case the opinion shall state that both
such counsel and Jennison Series Fund are justified in so relying. As
A-11
<PAGE>
to paragraph 7.5.2, such counsel may state that they have assumed that the
Agreement is governed by the laws of the State of Illinois. In rendering such
opinion, such counsel also may (a) make assumptions regarding the
authenticity, genuineness and/or conformity of documents and copies thereof
without independent verification thereof, (b) limit such opinion to applicable
federal and state law and (c) define the word "knowledge" and related terms to
mean the knowledge of attorneys then with such firm who have devoted
substantive attention to matters directly related to this Agreement and the
Reorganization.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE FUNDS
The obligations of each Fund hereunder are subject to the further conditions
that on or before the Closing Date:
8.1. This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of (a) the Board of Directors of each
Fund as to the determinations set forth in Rule 17a-8(a) under the
Investment Company Act, (b) the Board of Directors of Jennison Series Fund
as to the assumption by Acquiror Fund of the liabilities of Acquiree Fund
and (c) the holders of the outstanding shares of Acquiree Fund in
accordance with the provisions of Acquiree Fund's Articles of
Incorporation, and certified copies of the resolutions evidencing such
approvals shall have been delivered to Acquiror Fund.
8.2. Any proposed change to Acquiror Fund's operations that may be
approved by the Board of Directors of Jennison Series Fund subsequent to
the date of this Agreement but in connection with and as a condition to
implementing the transaction contemplated by this Agreement, for which the
approval of Acquiror Fund's shareholders is required pursuant to the
Investment Company Act or otherwise, shall have been approved by the
requisite vote of the holders of the outstanding shares of Acquiror Fund in
accordance with the Investment Company Act and the provisions of Jennison
Series Fund's Articles of Incorporation and the General Corporation Law of
the State of Maryland, and certified copies of the resolution evidencing
such approval shall have been delivered to Acquiree Fund.
8.3. On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transaction contemplated herein.
8.4. All consents of other parties and all consents, orders and permits
of federal, state and local regulatory authorities (including those of the
SEC and of state Blue Sky or securities authorities, including "no-action"
positions of such authorities) deemed necessary by either Fund to permit
consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse
effect on the assets or properties of either Fund, provided that either
party hereto may for itself waive any part of this condition.
8.5. The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall
have been issued, and to the best knowledge of the parties hereto, no
investigation or proceeding under the 1933 Act for that purpose shall have
been instituted or be pending, threatened or contemplated. In addition, the
SEC shall not have issued an unfavorable report with respect to the
Reorganization under section 25(b) of the Investment Company Act nor
instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the Investment
Company Act.
8.6. The Funds shall have received on or before the Closing Date an
opinion of Gardner, Carton & Douglas, satisfactory to each Fund,
substantially to the effect that for federal income tax purposes:
A-12
<PAGE>
8.6.1. The acquisition by Acquiror Fund of the assets of Acquiree
Fund solely in exchange for voting shares of Acquiror Fund and the
assumption by Acquiror Fund of Acquiree Fund's liabilities, if any,
followed by the distribution of Acquiror Fund's voting shares as a
liquidating distribution pro rata to Acquiree Fund's shareholders and
the liquidation of Acquiree Fund pursuant to the Reorganization and
constructively in exchange for Acquiree Fund's shares will constitute a
"reorganization" within the meaning of Internal Revenue Code Section
368(a)(1)(C), and Acquiree Fund and Acquiror Fund will each be "a party
to a reorganization" within the meaning of Internal Revenue Code
Section 368(b);
8.6.2. No gain or loss will be recognized by the shareholders of
Acquiree Fund upon receipt of Acquiror Fund shares solely in exchange
for and in cancellation of Acquiree Fund shares of common stock;
8.6.3. No gain or loss will be recognized to Acquiree Fund on the
transfer of all of its assets to Acquiror Fund solely in exchange for
shares of Acquiror Fund and the assumption by Acquiror Fund of the
liabilities, if any, of Acquiree Fund. In addition, no gain or loss
will be recognized to Acquiree Fund on the distribution of such shares
to Acquiree Fund's shareholders in liquidation by terminating Acquiree
Fund;
8.6.4. No gain or loss will be recognized to Acquiror Fund upon the
acquisition of the assets of Acquiree Fund solely in exchange for
shares of Acquiror Fund and the assumption of Acquiree Fund's
liabilities, if any;
8.6.5. The basis of Acquiree Fund assets in the hands of Acquiror
Fund will be the same as the basis of such assets in the hands of
Acquiree Fund immediately prior to the Reorganization;
8.6.6. The holding period of Acquiree Fund assets in the hands of
Acquiror Fund will include the period during which such assets were
held by Acquiree Fund immediately prior to the Reorganization;
8.6.7. The basis of Acquiror Fund shares to be received by
shareholders of Acquiree Fund will, in each instance, be the same as
the basis of the shares of common stock of Class A, Class B, Class C
and Class Z of Acquiree Fund held by such shareholders and cancelled in
the Reorganization; and
8.6.8. The holding period of Acquiror Fund shares to be received by
the shareholders of Acquiree Fund will include the holding period of
the shares of common stock of Acquiree Fund cancelled pursuant to the
Reorganization, provided that Acquiree Fund shares were held as capital
assets on the date of the Reorganization.
In rendering such opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations made
in this Agreement (or in separate letters addressed to such counsel) and the
certificates delivered pursuant to paragraph 3.4.
9. FINDER'S FEES AND EXPENSES
9.1. Each Fund represents and warrants to the other that there are no
finder's fees payable in connection with the transactions provided for
herein.
9.2. The expenses incurred in connection with entering into and carrying
out the provisions of this Agreement shall be allocated to the Funds pro
rata in a fair and equitable manner in proportion to their respective
assets.
A-13
<PAGE>
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. This Agreement constitutes the entire agreement between the Funds.
10.2. The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1. A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date;
or
11.2. A condition herein expressed to be precedent to the obligations of
either party not having been met and it reasonably appearing that it will
not or cannot be met; or
11.3. A mutual written agreement of the Funds.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to
pay their allocated expenses pursuant to paragraph 9.2) or any Director or
officer of either Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the Acquiree Fund's
shareholders' meeting called by Acquiree Fund pursuant to paragraph 5.2, no
such amendment may have the effect of changing the provisions for determining
the number of shares of Acquiror Fund to be distributed to Acquiree Fund
shareholders under this Agreement to the detriment of such shareholders
without their further approval.
13. NOTICES
Any notice, report, demand or other communication to either party required
or permitted by any provision of this Agreement shall be in writing and shall
be given by hand delivery, or prepaid certified mail or overnight service,
addressed to such party c/o Prudential Investments Fund Management LLC,
Gateway Center Three, Newark, New Jersey 07102, Attention: Marguerite E. H.
Morrison.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1. The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts, each
of which will be deemed an original.
14.3. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter
shall govern.
A-14
<PAGE>
14.4. This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its President or Vice President.
Prudential Multi-Sector Fund, Inc.
/s/ Richard A. Redeker
By:
-----------------------------------
Richard A. Redeker
President
Prudential Jennison Series Fund,
Inc.
on behalf of its series, Jennison
Growth Fund
/s/ Robert F. Gunia
By:
-----------------------------------
Robert F. Gunia
Vice President
A-15
<PAGE>
APPENDIX B
Prudential Jennison Growth Fund
A Series of the Prudential Jennison Series Fund, Inc.
Performance At A Glance.
Investors in U.S. stocks broadened their interest over the past 12 months beyond
the familiar brand-name market leaders to include the less well-known and
somewhat smaller companies favored by the Prudential Jennison Growth Fund. A
large proportion of our stocks also were in the two best-performing sectors:
technology and finance. As a result, your Fund generally returned six percentage
points (depending on the share class) more than the average growth fund, as
measured by Lipper Analytical Services.
<TABLE>
<CAPTION>
================================================================================
Cumulative Total Returns(1)
As of 9/30/97
================================================================================
One Since
Year Inception(2)
- -------------------------------------------------------------------------------
<S> <C> <C>
Class A 40.29% 53.90%
- -------------------------------------------------------------------------------
Class B 39.39 51.80
- -------------------------------------------------------------------------------
Class C 39.39 51.80
- -------------------------------------------------------------------------------
Class Z(3) 40.71 49.71
- -------------------------------------------------------------------------------
Lipper Growth Fund Avg(4) 33.52 ***
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Returns(1)
As of 9/30/97
================================================================================
One Since
Year Inception(2)
- -------------------------------------------------------------------------------
<S> <C> <C>
Class A 33.28% 21.99%
- -------------------------------------------------------------------------------
Class B 34.39 22.68
- -------------------------------------------------------------------------------
Class C 38.39 24.41
- -------------------------------------------------------------------------------
Class Z(3) 40.71 31.85
- -------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 5% for Class A
shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years, for Class B shares. Class C shares have a
1% CDSC for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, approximately seven years after purchase.
Class Z shares are not subject to a sales charge or a distribution fee.
(2) Inception dates: 11/2/95 for Class A, B, and C shares; 4/15/96 for Class Z
shares. On 9/20/96 The Prudential Institutional Fund - Growth Stock Fund
merged into the Jennison Growth Fund, Class Z shares.
(3) On September 20, 1996, the assets and liabilities of the Prudential
Institutional Fund -- Growth Stock Fund (Growth Stock Fund) were
transferred to the Prudential Jennison Growth Fund in exchange soley for
Class Z shares of the Fund. The investment objective and policies of both
funds were substantially similar and both shared the same investment
adviser. Accordingly, if you purchased shares of the Growth Stock Fund at
its inception on 11/5/92 and owned them through 9/20/96 (thereby
participating in the fund reorganization), and continued to own Class Z
shares received in the reorganization through 9/30/97, your average annual
total returns after fees and expenses would have been 40.71% for one year;
28.90% for three years; and 21.37% since inception. Your cumulative total
returns would have been 40.71%, 114.22% and 158.39% for the same time
periods, respectively.
(4) These are average returns for the 784 funds in Lipper Analytical Services'
Growth Fund category for the past year.
*** Lipper since inception returns were 56.82% for Class A, B and C shares and
39.05% for Class Z representing all funds in each share class.
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
How Investments Compared.
(As of 9/30/97)
- --------------------------------------------------------------------------------
12-Month 20-Year Average Annual
Total Returns Total Returns
------------- ----------------------
<S> <C> <C>
U.S. Growth Funds
General Bond Funds <plot-points-to-come>
General Muni Debt Funds
Money Market Funds
</TABLE>
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns historically have been lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but historically their returns have been generally among
the lowest of the major investment categories.
B-1
<PAGE>
================================================================================
================================================================================
David Poiesz, Fund Manager
Peter Reinemann, Associate Fund Manager
Portfolio
Managers' [PHOTO] [PHOTO]
Report /s/ David Poiesz /s/ Peter Reinemann
The Prudential Jennison Growth Fund invests primarily in stocks of medium and
large companies (generally those with a total market value of at least $1
billion) that we believe have above-average prospects for growth. The Fund may
also invest in stocks of foreign companies, investment grade bonds, and
securities issued or backed by the U.S. government and its agencies, such as
mortgage backed securities. There can be no assurance that the Fund will achieve
its investment objective.
- --------------------------------------------------------------------------------
Our Investment Style.
We are growth investors with a difference. Jennison tries to identify stocks'
potential for earnings growth over the coming 12 to 18 months. We look for firms
that can control their own destinies and have room to grow, so we tend to focus
on medium- to large-sized companies. Because we use a longer time horizon than
many growth investors, we can weather the turbulence, or even benefit, when a
well-managed company has a short-term disappointment.
- --------------------------------------------------------------------------------
Strategy Session.
- --------------------------------------------------------------------------------
Our focus on long-term earnings growth potential not only paid off for us
handsomely this year, it helped us buy inexpensively for future growth.
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
Portfolio Composition.
Sectors expressed as a percentage
of net assets as of 9/30/97.
================================================================================
<S> <C>
Energy 3%
Basic Materials 1%
Technology 34%
Cash 1%
Financial Services 15%
Intermediate Goods & Services 14%
Healthcare 14%
Consumer Staples 13%
Capital Spending 5%
================================================================================
</TABLE>
We were patient. The "rolling bear" in technology has finished its roll.
Oversupplies of cellular phones and personal computers in late 1995 created a
rolling bear market as pressures moved through the supply chain. The last to be
affected were the networking companies, which had become relatively expensive as
the only technology industry that hadn't had a downturn. When these stocks fell
early this year, we bought. After similar corrections in the past, technology
stocks followed up with several years of excellent performance.
We didn't jump ship. Pfizer's share price dropped this past summer because their
marketing and development expenses jumped, but this was because more drugs
received FDA approval than expected. We already owned Pfizer, but we took
advantage of the overreaction to buy about 50% more at a lower price. We think
that analysts will raise next year's earnings estimates.
And we have a wide perspective. We take into account the impact of the business
climate on future earnings.
When interest rates are low, financial stocks historically have risen. Their
business grows because borrowing is cheaper. In addition to some large companies
- -- such as Chase Manhattan Bank and the Mortgage Guarantee Insurance Corporation
(MGIC), a dominant player in the mortgage insurance business -- we own Mutual
Risk Management, a small-cap insurance services company. Financial stocks are
selling at very reasonable price-to-earnings ratios.
B-2
<PAGE>
What Went Well.
- --------------------------------------------------------------------------------
Good Companies.
Although we select stocks company by company, our holdings fell predominantly in
the top-performing sectors of the stock market: technology, health care and
financial services. We also benefited from a shift in investor preferences. For
a while, investors pushed prices ever higher on a few dozen of the largest
familiar stocks -- too high in our judgment. We bought less well-known firms
that we thought represented better value. This summer, the market leaders
appeared to hit earnings plateaus and investors looked more widely for
inexpensive stocks. They found us there first, and bid up the prices of our
holdings.
o Among technology stocks, the companies that did well for us included the
computer companies Dell and Compaq, the chipmakers Intel and Texas Instruments,
and the software company Microsoft. The telecommunications company Nokia also
was a big winner for us.
o Schlumberger is an oil services company that is using technology to reduce its
customers' cost of getting oil out of the ground. It is much cheaper to extract
oil today than it was 10 years ago. Our shares performed very well.
o Some drug companies have products that can save lives or help lower the cost
of health care by reducing hospital stays. Much of their sales are in the U.S.,
so an expensive dollar doesn't hurt their earnings as much as some other
multinational companies. Lilly was a large contributor to this year's return.
Our portfolio also includes Pfizer, SmithKline Beecham, Bristol-Myers Squibb and
Warner Lambert.
And Not So Well.
- --------------------------------------------------------------------------------
PhyCor (a health care company) and Monsanto (chemicals) haven't paid off yet,
although we still expect them to. We sold our EDS (data processing) shares after
three earnings disappointments, as well as our investments in Picturetel
(electrical equipment) and Astra (pharmaceuticals).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Largest
Holdings.
<S> <C>
3.5% Pfizer, Inc.
Pharmaceuticals
3.2% Hewlett-Packard Co.
Computer Systems
3.1% Cisco Systems, Inc.
Networking
2.7% Intel Corp.
Electronic Components
2.6% Schlumberger, Ltd.
Oil Services
</TABLE>
Expressed as a percentage of net assets as of 9/30/97.
- --------------------------------------------------------------------------------
Looking Ahead.
- --------------------------------------------------------------------------------
We think our retail stocks still have considerable potential. For example, we
own Sears Roebuck and Kohl's Department stores. The latter is a seven-state
chain of retailers oriented to mid-priced apparel. Its stores are friendly and
efficient and we see them expanding nationwide. Kohl's already has contributed
above-average gains to our return.
We anticipate further strong performance from our technology companies. We
expect Hewlett Packard's growth to accelerate when it introduces its next
generation of servers and printer technology, and our networking stocks are
still recovering from their first quarter slowdown.
We also think business conditions for our pharmaceutical and financial companies
still create substantial long-range potential.
- --------------------------------------------------------------------------------
B-3
<PAGE>
Comparing A $10,000 Investment.
- -------------------------------
Prudential Jennison Growth Fund vs.
the S&P 500 Index.
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, will be
worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Jennison Growth Fund (Class A,
Class B, Class C and Class Z) with a similar investment in the S&P 500 Index
(the Index) by portraying the initial account values at the commencement of
operations of each class, and subsequent account values at the end of this
reporting period (September 30), as measured on a quarterly basis, beginning in
1995 for Class A, Class B and Class C shares; and in 1996 for Class Z shares.
For purposes of the graphs, and unless otherwise indicated, in the accompanying
tables it has been assumed (a) that the maximum applicable front-end sales
charge was deducted from the initial $10,000 investment in Class A shares; (b)
the maximum applicable contingent deferred sales charge was deducted from the
value of the investment in Class B and Class C shares, assuming full redemption
on September 30, 1997; (c) all recurring fees (including management fees) were
deducted; and (d) all dividends and distributions were reinvested. Class B
shares will automatically convert to Class A shares, on a quarterly basis,
beginning approximately seven years after purchase. This conversion feature is
not reflected in the graph. Class Z shares are not subject to a sales charge or
a distribution fee.
The S&P 500 is a capital-weighted index, representing the aggregate market value
of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the reinvestment of all
dividends, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Fund. The securities in the S&P 500
may differ substantially from the securities in the Fund. The S&P 500 is not the
only index that may be used to characterize performance of stock funds and other
indexes may portray different comparative performance.
[THE FOLLOWING TABLES WERE REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class A
=======
11/2/95 9/30/97
------- -------
<S> <C> <C>
Prudential Jennison
Growth Fund $10,000 $14,621
S&P 500 Index $10,000 $16,957
</TABLE>
Average Annual Total
Returns - Class A
--------------------
With Sales Load
21.99% Since Inception
33.28% for 1 Year
Without Sales Load
25.31% Since Inception
40.29% for 1 Year
[THE FOLLOWING TABLES WERE REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class B
=======
11/2/95 9/30/97
------- -------
<S> <C> <C>
Prudential Jennison
Growth Fund $10,000 $14,780
S&P 500 Index $10,000 $16,957
</TABLE>
Average Annual Total
Returns - Class B
--------------------
With Sales Load
22.68% Since Inception
34.39% for 1 Year
Without Sales Load
24.41% Since Inception
39.39% for 1 Year
[THE FOLLOWING TABLES WERE REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class C
=======
11/2/95 9/30/97
------- -------
<S> <C> <C>
Prudential Jennison
Growth Fund $10,000 $15,180
S&P 500 Index $10,000 $16,957
</TABLE>
Average Annual Total
Returns - Class C
--------------------
With Sales Load
24.41% Since Inception
38.39% for 1 Year
Without Sales Load
24.41% Since Inception
39.39% for 1 Year
[THE FOLLOWING TABLES WERE REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class Z
=======
4/15/96 9/30/97
------- -------
<S> <C> <C>
Prudential Jennison
Growth Fund $10,000 $14,970
S&P 500 Index $10,000 $14,906
</TABLE>
Average Annual Total
Returns - Class Z
--------------------
Without Sales Load
31.85% Since Inception
40.71% for 1 Year
B-4
<PAGE>
Prudential Multi-Sector Fund, Inc.
Performance At A Glance.
While small and medium-sized companies delivered positive returns over the past
12 months, they trailed larger company stocks. So while we are pleased to report
that your Fund performed better than the average capital appreciation mutual
fund during the past year (as measured by Lipper Analytical Services), we must
note that neither did as well as the broad stock market (as measured by the
Standard & Poor's 500 Index). That's because of the growth-style, sector-based
strategy of your Fund, which led us to invest in small and mid-sized companies.
<TABLE>
<CAPTION>
================================================================================
Cumulative Total Returns(1)
As of 4/30/97
================================================================================
One Five Since
Year Years Inception(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 5.2% 87.1% 116.5%
- -------------------------------------------------------------------------------
Class B 4.4 80.0 105.3
- -------------------------------------------------------------------------------
Class C 4.4 N/A 33.4
- -------------------------------------------------------------------------------
Class Z 5.5 N/A 9.3
- -------------------------------------------------------------------------------
Lipper Capital
Appreciation Fund Avg(3) 3.0 86.3 ***
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Returns(1)
As of 3/31/97
================================================================================
One Five Since
Year Years Inception(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 0.8% 11.5% 10.8%
- --------------------------------------------------------------------------------
Class B 0.3 11.7 10.8
- --------------------------------------------------------------------------------
Class C 4.3 N/A 10.2
- --------------------------------------------------------------------------------
Class Z 6.3 N/A 5.6
- --------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 5% for Class A
shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years for Class B shares. Class C shares have a
1% CDSC for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, approximately seven years after purchase.
Class Z shares are not subject to a sales charge or a distribution fee.
(2) Inception dates: 6/29/90 Class A and B; 8/1/94 Class C; 3/1/96 Class Z.
(3) Lipper average returns are for 204 funds for one year and 77 funds for five
years.
*** Lipper Since Inception category cumulative return are: Class A and B,
124.1% for 70 funds; Class C, 44.9% for 128 funds; and Class Z, 7.5% for
202 funds.
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
How Investments Compared.
(As of 4/30/97)
================================================================================
12-Month 20-Year Average
Total Returns Annual Total Returns
------------- --------------------
<S> <C> <C>
U.S. Growth Funds <plot-points-to-come>
General Bond Funds
General Muni Debt Funds
U.S. Taxable Money Funds
</TABLE>
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds. General Municipal Debt Funds invest in bonds issued by
state governments, state agencies and/or municipalities. This investment
provides income that is usually exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
B-5
<PAGE>
================================================================================
================================================================================
Greg Goldberg and Jeffrey T. Rose, Fund Managers
Portfolio [PHOTO] [PHOTO]
Managers'
Report /s/ Greg Goldberg /s/ Jeffrey T. Rose
The Fund seeks long-term capital growth by investing primarily in domestic and
foreign stocks of companies in specific economic sectors, and makes significant
shifts among these sectors based on world economic changes and other investment
trends. We select stocks following a growth investment style, looking for stocks
with above-average revenue and earnings growth forecast and that are
attractively priced. The Fund may be affected to a greater extent by any single
economic, political or regulatory development than a mutual fund that does not
focus its investments on specific economic sectors. There can be no assurance
the Fund will achieve its investment objective.
- --------------------------------------------------------------------------------
Sectors & Stocks.
Since its inception, the Prudential Multi-Sector Fund has followed the sector
selection of Greg Smith, Chief Investment Strategist at Prudential Securities,
and the securities selection of its portfolio managers. We've decided to put
sector and security selection in one place. Effective June 2, Portfolio Managers
Greg Goldberg and Jeff Rose, who have been selecting securities, will also
select sectors.
- --------------------------------------------------------------------------------
Strategy Session.
- --------------------------------------------------------------------------------
We invest in sectors that we believe may perform better than the market as a
whole in the short term, and try to avoid those that might do worse. As a
result, we frequently adjust our holdings to take advantage of changing market
conditions.
So over the past 12 months we added to our positions in energy and healthcare
stocks while we reduced our holdings in technology and financial services.
o Energy: A year ago, we did not hold any investments here. Today, it's our
second largest sector. Energy companies have been benefitting from global
growth. Though we expect some volatility in the short term, we believe the trend
is up for energy prices over the long haul.
o Healthcare: Over the past 12 months we have increased our healthcare holdings.
An aging worldwide population is increasing demand for drugs and healthcare,
which should continue to benefit companies in this industry.
Over the last 12 months, we've nearly halved our technology holdings. While we
believe in this sector for the long term, we feel that the months ahead will be
difficult.
We also sold a small portion of our financial services holdings because we were
concerned that interest rates could continue to rise.
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 4/30/97.
================================================================================
<S> <C>
Industrial 4%
Consumer Growth
& Cyclical 26%
Energy 24%
Technology 18%
Finance 16%
Consumer Cyclical 7%
Cash/Other 5%
================================================================================
</TABLE>
B-6
<PAGE>
What Went Well.
- --------------------------------------------------------------------------------
Riding the Tech Rally.
It's not always easy to get your timing right in the volatile technology sector,
but we were pleased with our decision to sell most of our shares in Cisco
Systems, the leader in computer networking. We sold the stock at a profit after
it had appreciated significantly. We were glad we did, because by the end of
this reporting period it was well off its highs.
We've also had a great deal of success with Intel, which more than doubled in
price during the last 12 months. We believe Intel will continue to perform well
as it complements its PC chip strengths with its move into networking.
Financials Pay Off.
The continuing strong performance of financial services stocks also helped the
Fund. Travelers, a conglomerate offering insurance, brokerage and other
financial services, rose 83% over the last 12 months. Smith Barney, the firm's
securities brokerage subsidiary, posted substantial profits, buoyed by the
strong financial markets.
Bits and Pieces.
Within the energy sector, drill bit maker Smith International was up 63% over
the 12 months. You can't drill for oil without bits, so Smith, the leading drill
bit manufacturer, benefited from increased drilling activity worldwide. In
healthcare, Aetna/U.S. Healthcare's transformation into an HMO force helped it
rise 29%.
And Not So Well.
- --------------------------------------------------------------------------------
The Crushing Technology Wave.
Technology stocks are volatile -- almost by definition -- and many of these
stocks fell in price late in our reporting period. While we did hold some
winners in technology, our relatively large position as much as 32% of total
investments during the last year prevented us from performing as well as the
broader stock market. We may now look to this sector for buying opportunities.
One victim of the crushing technology wave was Westell, on the cutting edge of
ADSL technology which is bringing internet services to the home. The firm's
stock lost half its value as anticipated contracts with telecommunications
providers were delayed by mergers and regulatory concerns in the
telecommunications industry. Still, we expect its price to rebound as conditions
in the telecommunications industry improve.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Five Largest
Holdings.
<S> <C>
3.9% Novartis A.G. (A.D.R.)
Healthcare
3.5% Exxon Corp.
Energy
2.9% Uniphase Corp.
Technology
2.8% Aetna, Inc.
Healthcare
2.5% UCAR International Inc.
Precious metals
</TABLE>
Expressed as a percentage of total investments as of 4/30/97.
- --------------------------------------------------------------------------------
Looking Ahead.
- --------------------------------------------------------------------------------
The U.S. stock market is now in its sixth year of a bull market. We're still
cautious in the short term for two reasons: 1) valuations are historically high,
especially in the so-called "Nifty Fifty" large company stocks and 2) interest
rates may very well rise further. Nevertheless, we will continue to look for
individual sectors and industries that may perform better than the market as a
whole.
We will be watching financial services closely. While prices in this sector are
currently attractive, stocks could be hurt if interest rates rise significantly.
We will await the Federal Reserve's decision.
- --------------------------------------------------------------------------------
B-7
<PAGE>
Comparing A $10,000 Investment.
- -----------------------------------
Prudential Multi-Sector Fund, Inc.
vs. the S&P 500 Index.
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than their original cost. The box on top of the graphs (where
applicable) are designed to give you an idea how much the Fund's returns can
fluctuate from year to year by measuring the best and worst calendar years in
terms of total annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Multi-Sector Fund (Class A, Class
B, Class C and Class Z) with a similar investment in the S&P 500 Index by
portraying the initial account values at the commencement of operations of each
class, and subsequent account values at the end of this reporting period (April
30), as measured on a quarterly basis, beginning in 1990 for Class A and B
shares; in 1994 for Class C shares and in 1996 for Class Z shares. For purposes
of the graphs, and unless otherwise indicated, in the accompanying tables it has
been assumed (a) that the maximum applicable front-end sales charge was deducted
from the initial $10,000 investment in Class A shares; (b) the maximum
applicable contingent deferred sales charge was deducted from the value of the
investment in Class B and Class C shares, assuming full redemption on April 30,
1997; (c) all recurring fees (including management fees) were deducted; and (d)
all dividends and distributions were reinvested. Class Z shares do not have a
sales charge or a distribution fee. Class B shares will automatically convert to
Class A shares, on a quarterly basis, beginning approximately seven years after
purchase. This conversion feature is not reflected in the graph.
The S&P 500 is a capital-weighted index, representing the aggregate market value
of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the reinvestment of all
dividends, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Fund. The securities in the S&P 500
may differ substantially from the securities in the Fund. The S&P 500 is not the
only index that may be used to characterize performance of stock funds and other
indexes may portray different comparative performance. Investors cannot directly
invest in an index.
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class A
=======
---------------------
Best Year: 1991 27.6%
Worst Year: 1992 2.1%
---------------------
6/29/90 4/30/97
------- -------
<S> <C> <C>
Prudential Multi-Sector Fund, Inc. $10,000 $20,565
S&P 500 Index. $10,000 $26,877
</TABLE>
Average Annual Total
Returns - Class A
-------------------------
With Sales Load
11.1% Since Inception
12.2% for 5 Years
0.0% for 1 Year
Without Sales Load
12.0% Since Inception
13.4% for 5 Years
5.2% for 1 Year
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class B
=======
----------------------
Best Year: 1991 26.7%
Worst Year: 1992 1.2%
----------------------
6/29/90 4/30/97
------- -------
<S> <C> <C>
Prudential Multi-Sector Fund, Inc. $10,000 $20,530
S&P 500 Index. $10,000 $26,877
</TABLE>
Average Annual Total
Returns - Class B
-------------------------
With Sales Load
11.1% Since Inception
12.4% for 5 Years
(0.6)% for 1 Year
Without Sales Load
11.1% Since Inception
12.5% for 5 Years
4.4% for 1 Year
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class C
=======
8/1/94 4/30/97
------ -------
<S> <C> <C>
Prudential Multi-Sector Fund, Inc. $10,000 $13,342
S&P 500 Index. $10,000 $17,946
</TABLE>
Average Annual Total
Returns - Class C
-------------------------
With Sales Load
11.1% Since Inception
3.4% for 1 Year
Without Sales Load
11.1% Since Inception
4.4% for 1 Year
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class Z
=======
3/1/96 4/30/97
------ -------
<S> <C> <C>
Prudential Multi-Sector Fund, Inc. $10,000 $10,927
S&P 500 Index. $10,000 $12,697
</TABLE>
Average Annual Total
Returns - Class Z
-------------------------
Without Sales Load
7.9% Since Inception
5.5% for 1 Year
B-8
<PAGE>
Prudential Multi-Sector Fund, Inc.
Performance At A Glance.
The Prudential Multi-Sector Fund beat the volatile overall market (as
represented by the Standard & Poor's 500 Index) by five percentage points for
the six months ending October 31. Our energy holdings did particularly well and
low-performing industrial stocks were a smaller part of our portfolio than of
the index. Nonetheless, we trailed the average capital appreciation fund, as
measured by Lipper Analytical Services, because our health care stocks lost
ground and we didn't participate in the exceptionally high returns of money
center banks and stock brokerages.
<TABLE>
<CAPTION>
================================================================================
Cumulative Total
Returns(1)
As of 10/31/97
================================================================================
Six One Five Since
Months Year Years Inception(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 20.28% 20.86% 122.34% 160.38%
- -------------------------------------------------------------------------------
Class B 19.83 19.97 114.04 146.02
- -------------------------------------------------------------------------------
Class C 19.83 19.97 N/A 59.88
- -------------------------------------------------------------------------------
Class Z 20.39 21.06 N/A 31.55
- -------------------------------------------------------------------------------
Lipper Capital
Appreciation Fund Avg(3) 22.30 22.74 119.38 ***
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Returns(1)
As of 9/30/97
================================================================================
One Five Since
Year Years Inception(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 22.49% 17.44% 14.10%
- --------------------------------------------------------------------------------
Class B 22.98 17.64 14.02
- --------------------------------------------------------------------------------
Class C 26.98 N/A 17.89
- --------------------------------------------------------------------------------
Class Z 29.14 N/A 22.77
- --------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's share, when redeemed, may be worth
more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 5% for Class A
shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years, for Class B shares. Class C shares have a
1% CDSC for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, approximately seven years after purchase.
Class Z shares do not carry a sales charge or a distribution fee.
(2) Inception dates: Class A and Class B, 5/24/90; Class C, 8/1/94; Class Z,
3/1/96.
(3) These are average returns for the 240 funds in Lipper Analytical Services'
Capital Appreciation category for the past six months, 203 for the past
year, and 77 for the past five years.
*** Lipper Since Inception returns are: Class A, and Class B, 172.81%; Class C,
83.83%; and Class Z, 30.78% for all funds in each share class.
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
How Investments Compared.
(As of 10/31/97)
================================================================================
12-Month 20-Year Average Annual
Total Returns Total Returns
------------- ----------------------
<S> <C> <C>
U.S. Growth Funds
General Bond Funds <plot-points-to-come>
General Muni Debt Funds
Money Market Funds
</TABLE>
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
B-9
<PAGE>
================================================================================
================================================================================
Greg Goldberg, Fund Manager
[PHOTO]
Portfolio
Managers' Report /s/ Greg Goldberg
The Fund seeks long-term capital growth by investing primarily in the stocks of
domestic and foreign companies in specific economic sectors. We invest with a
growth style, looking for stocks with above-average revenue and earnings growth.
We focus our stock selection on certain themes -- established long-term trends
- -- that may identify companies in different global markets or of any size. The
Fund may be affected to a greater extent by a single economic, political, or
regulatory development than a mutual fund that is not as concentrated. There can
be no assurance that the Fund will achieve its investment objective.
- --------------------------------------------------------------------------------
Evolving Strategy
Our strategy has evolved. We are still aggressively concentrated in the stocks
we think have the most growth potential. At least a third of our assets will be
in our top 10 stocks. But now we focus on long-term themes that guide our
selections.
However, because they are not cyclical, we can hold our strong growth stocks
longer.
- --------------------------------------------------------------------------------
Strategy Session.
- --------------------------------------------------------------------------------
We concentrate our portfolio in order to get the full benefit of our best stock
selections. Our 10 best stocks comprised 37% of the portfolio on October 31 and
our top 20 normally will comprise about two thirds. Our stock selection is
guided by themes -- trends that we believe will particularly favor some
industries or companies. We are currently following three investment themes:
The aging of America -- as the average age of the population increases, we
expect certain industries and firms to benefit, such as the health care and
leisure industries. Toys R Us is among our top 20 holdings because grandparents
tend to spend heavily on grandchildren.
Productivity means technology -- we increased our technology holdings to 32% of
total net assets as of October 31. We are avoiding companies focused on the
competitive home personal computer market, favoring instead software and
networking companies. Cisco Systems and 3Com are among our top five holdings.
Global economic expansion -- The global economy is growing rapidly, creating a
strong and widely based demand for energy. Recently we focused on oil service
companies, which are necessary to keep energy flowing. Schlumberger -- a large
supplier of oil servicing -- is our fourth largest holding.
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
Portfolio Composition.
Sectors expressed as a percentage
of net assets as of 10/31/97.
================================================================================
<S> <C>
Finance 8%
Cash 4%
Technology 32%
Industrial 9%
Consumer Growth 24%
Consumer Cyclical 8%
Energy 15%
================================================================================
</TABLE>
B-10
<PAGE>
What Went Well.
- --------------------------------------------------------------------------------
Some Winners.
Some of our investments had exceptional six-month returns in our reporting
period. For example, Crescent Real Estate and Patriot American Hospitality --
two REITs (real estate investment trusts) each gained more than 50%. The former
owns office buildings, the latter owns hotels. We took profits, reducing our
positions substantially.
The U.S. economic expansion provided strong returns for our investments in
financial services, particularly a pair of consumer credit companies: Imperial
Credit and The Money Store. These companies rose 53% and 32%, respectively.
Our technology holdings also had a good year. We took some profits on Uniphase,
a photonics company, but it is still among our 10 largest holdings. Photonics is
the technology for using light waves instead of electricity to carry data, as in
fiber optic cable and lasers. Uniphase rose 69%.
Our focus on oil service companies also helped our return. Schlumberger and
Smith International each rose almost 60%. We took some profits on Schlumberger,
but prices are volatile in this sector; we may buy more if the price declines
again. J. Ray McDermott gained more than 140%, while McDermott International,
Input/Output and one of our foreign holdings, Bouyges Offshore, almost doubled.
And Not So Well.
- --------------------------------------------------------------------------------
Some Rough Spots.
Two of our larger holdings, the hospital management firms Aetna and Columbia
HCA, turned in negative returns for the period. This industry is still young and
is struggling more than we anticipated to bring large-scale financial management
to medical care. In medical devices, we sold Boston Scientific at a loss because
the fall period for introducing new products revealed unforeseen problems.
Our purchase of 3Com is not going smoothly, largely because of its acquisition
of U.S. Robotics. 3Com is a networking company. This year it bought the premier
manufacturer of modem cards, which are the predominant home connection to the
internet. 3Com found its distribution channels, both domestically and overseas,
fully stocked. With high inventories, sales and earnings dropped and the stock
price followed. However, we expect the surplus inventory to be cleared out soon
and the company's basic strength to be reflected in its stock price.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Five Largest
Holdings.
<S> <C>
5.6% Cisco Systems
Computer Networking
5.2% Novartis AG (ADR)
Pharmaceuticals
4.4% 3Com Corp.
Computer Networking
4.1% Schlumberger
Oil Services
3.2% Nordstrom
Retail
</TABLE>
Expressed as a percentage of net assets as of 10/31/97.
- --------------------------------------------------------------------------------
Looking Ahead.
- --------------------------------------------------------------------------------
Our investment themes are long range. Productivity means technology leads us to
photonics, a technology still in its early stages. We expect this technology to
grow.
The accelerating sales of personal computers costing less than $1,000 will
expand the market, but will squeeze margins for both computer and component
manufacturers. We are focusing on software and networking companies, which we
think will be the long-term winners from greater computer use.
- --------------------------------------------------------------------------------
B-11
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SYNOPSIS.................................................................. 2
General................................................................. 2
The Proposed Reorganization and Liquidation............................. 2
Reasons for the Proposed Reorganization................................. 3
Structure of the Funds.................................................. 4
Investment Objectives and Policies...................................... 5
Certain Differences Between the Funds................................... 5
Fees and Expenses....................................................... 6
Management Fees....................................................... 6
Distribution Fees..................................................... 6
Other Expenses........................................................ 7
Expense Ratios........................................................ 7
Purchase of Shares...................................................... 9
Redemptions--How to Sell Your Shares.................................... 12
Conversion Feature--Class B Shares...................................... 13
Exchange Privileges..................................................... 13
Dividends and Other Distributions....................................... 14
Federal Income Tax Consequences of the Proposed Reorganization.......... 14
PRINCIPAL RISK FACTORS.................................................... 15
Foreign Securities...................................................... 15
High Yield Securities................................................... 15
Hedging and Return Enhancement Activities............................... 16
Short Sales............................................................. 16
Borrowing............................................................... 17
Realignment of Investment Portfolio..................................... 17
THE PROPOSED TRANSACTION.................................................. 17
Agreement and Plan of Reorganization and Liquidation.................... 17
Reasons for the Reorganization.......................................... 18
Description of Securities to be Issued.................................. 19
Federal Income Tax Considerations....................................... 19
Certain Comparative Information About Jennison Series Fund and Multi-
Sector Fund............................................................ 20
Organization.......................................................... 20
Capitalization........................................................ 20
Shareholder Meetings and Voting Rights................................ 20
Shareholder Liability................................................. 21
Liability and Indemnification of Directors............................ 21
Pro Forma Capitalization and Ratios..................................... 21
INFORMATION ABOUT THE GROWTH FUND......................................... 23
INFORMATION ABOUT MULTI-SECTOR FUND....................................... 25
VOTING INFORMATION........................................................ 26
OTHER MATTERS............................................................. 27
SHAREHOLDERS' PROPOSALS................................................... 28
APPENDIX A--Agreement and Plan of Reorganization and Liquidation.......... A-1
APPENDIX B--Performance Overview.......................................... B-1
ENCLOSURES
Prospectus of Prudential Jennison Series Fund, Inc., dated January 23,
1998
</TABLE>
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 12, 1998
ACQUISITION OF ASSETS OF
PRUDENTIAL MULTI-SECTOR FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
----------------
BY AND IN EXCHANGE FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF
PRUDENTIAL JENNISON GROWTH FUND, A SERIES OF
PRUDENTIAL JENNISON SERIES FUND, INC.
This Statement of Additional Information specifically relates to the
proposed transfer of all of the assets and the assumption of all of the
liabilities, if any, of Prudential Multi-Sector Fund, Inc. (Multi-Sector Fund)
by Prudential Jennison Growth Fund (the Growth Fund), a portfolio of
Prudential Jennison Series Fund, Inc. (Jennison Series Fund). This Statement
of Additional Information consists of this cover page and the following
described documents, each of which is attached hereto and incorporated herein
by reference:
1. Pro Forma Financial Statements as of September 30, 1997.
2. Statement of Additional Information of Jennison Series Fund.
3. Annual Report of the Growth Fund for the fiscal year ended September
30, 1997.
4. Annual Report of Multi-Sector Fund for the fiscal year ended April
30, 1997.
5. Semi-Annual Report of Multi-Sector Fund for the six-month period
ended October 31, 1997.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated May 12,
1998, relating to the above-referred matter. A copy of the Prospectus and
Proxy Statement may be obtained from Jennison Series Fund without charge by
writing or calling Jennison Series Fund at the address or phone number listed
above.
1
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------- -------------------------------------
GROWTH MULTI-SECTOR PRO FORMA MULTI-SECTOR PRO FORMA
FUND FUND COMBINED DESCRIPTION GROWTH FUND FUND COMBINED
------ ------------ --------- ------------------------ ----------- ------------ ------------
<C> <C> <C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS--
98.4%
AEROSPACE/DEFENSE--1.8%
325,000 -- 325,000 Boeing Co. $17,692,188 $ -- $ 17,692,188
396,000 -- 396,000 Gartner Group, Inc. 11,880,000 -- 11,880,000
------------
29,572,188
------------
AUTOMOBILES & TRUCKS--
0.2%
-- 44,000 44,000 General Motors Corp -- 2,945,250 2,945,250
------------
BASIC INDUSTRY--0.2%
-- 279,800 279,800 Agrium, Inc. (Canada) -- 3,360,961 3,360,961
------------
BANKS & FINANCIAL
SERVICES--7.5%
218,900 -- 218,900 Chase Manhattan Corp. 25,830,200 -- 25,830,200
Crescent Real Estate
-- 2,600 2,600 Equities, Inc. -- 104,325 104,325
Federal National
-- 100,000 100,000 Mortgage Association -- 4,700,000 4,700,000
Imperial Credit
-- 317,900 317,900 Industries, Inc. -- 8,424,350 8,424,350
ReliaStar Financial
-- 160,200 160,200 Corp. -- 6,377,963 6,377,963
260,900 -- 260,900 MBNA Corp. 10,566,450 -- 10,566,450
-- 303,200 303,200 The Money Store, Inc. -- 8,641,200 8,641,200
Morgan Stanley, Dean
421,390 -- 421,390 Witter, Discover & Co. 22,781,397 -- 22,781,397
399,600 -- 399,600 Schwab (Charles) Corp. 14,285,700 -- 14,285,700
-- 1 1 Travelers Group, Inc. -- 68 68
329,400 -- 329,400 Washington Mutual, Inc. 22,975,650 -- 22,975,650
------------
124,687,303
------------
BUSINESS SERVICES--4.5%
CUC International, Inc.
627,425 -- 627,425 (a) 19,450,175 -- 19,450,175
Eagle River Interactive,
377,600 -- 377,600 Inc. (a) 4,059,200 -- 4,059,200
318,800 -- 318,800 Manpower, Inc. 12,592,600 -- 12,592,600
276,500 -- 276,500 Omnicom Group, Inc. 20,115,375 -- 20,115,375
Reuters Holdings, PLC
269,800 -- 269,800 (ADR)(UK) 19,223,250 -- 19,223,250
------------
75,440,600
------------
CELLULAR
COMMUNICATIONS--0.7%
Vodafone Group PLC
214,600 -- 214,600 (ADR)(UK) 11,534,750 -- 11,534,750
------------
CHEMICALS--1.1%
460,000 -- 460,000 Monsanto Co. 17,940,000 -- 17,940,000
------------
COMPUTER
SYSTEMS/PERIPHERALS--
7.3%
404,800 -- 404,800 Compaq Computer Corp. (a) 30,258,800 -- 30,258,800
218,400 -- 218,400 Dell Computer Corp. (a) 21,157,500 -- 21,157,500
362,700 -- 362,700 Diebold, Inc. 17,182,913 -- 17,182,913
558,900 -- 558,900 Hewlett-Packard Co. 38,878,481 -- 38,878,481
International Business
116,400 -- 116,400 Machines Corp. 12,331,125 -- 12,331,125
-- 50,000 50,000 McAfee Associates, Inc. -- 2,650,000 2,650,000
------------
122,458,819
------------
</TABLE>
2
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------- ---------------------------------------
GROWTH MULTI-SECTOR PRO FORMA MULTI-SECTOR PRO FORMA
FUND FUND COMBINED DESCRIPTION GROWTH FUND FUND COMBINED
------ ------------ --------- ------------------------ ----------- ------------ ---------
<C> <C> <C> <S> <C> <C> <C>
DIVERSIFIED CONSUMER
PRODUCTS--1.6%
-- 135,000 135,000 Corning, Inc. $ -- $ 6,378,750 $ 6,378,750
206,700 -- 206,700 General Electric Co. 14,068,519 -- 14,068,519
-- 145,700 145,700 Philip Morris Cos., Inc. -- 6,055,656 6,055,656
------------
26,502,925
------------
EDP SOFTWARE &
SERVICES--2.8%
-- 117,500 117,500 Documentum Inc. -- 3,906,875 3,906,875
339,400 -- 339,400 Intuit, Inc. (a) 10,860,800 -- 10,860,800
130,400 -- 130,400 Microsoft Corp. 17,253,550 -- 17,253,550
165,500 -- 165,500 SAP AG (ADR) (Germany) 14,728,110 -- 14,728,110
------------
46,749,335
------------
ELECTRONIC COMPONENTS--
4.8%
348,800 -- 348,800 Intel Corp. 32,198,600 -- 32,198,600
International Rectifier
610,400 -- 610,400 Corp. (a) 14,268,100 -- 14,268,100
372,200 -- 372,200 LSI Logic Corp. (a) 11,956,925 -- 11,956,925
161,800 -- 161,800 Texas Instruments, Inc. 21,863,225 -- 21,863,225
------------
80,286,850
------------
ENERGY--3.5%
Alberta Energy Co., Ltd.
-- 176,900 176,900 (a) -- 4,245,600 4,245,600
-- 147,400 147,400 BJ Services Co. (a) -- 10,944,450 10,944,450
Bouygues Offshore S.A.
-- 341,700 341,700 (ADR) (a) -- 8,542,500 8,542,500
-- 133,900 133,900 Input/Output, Inc. (a) -- 3,966,788 3,966,788
J. Ray McDermott, S.A.
-- 173,000 173,000 (a) -- 8,477,000 8,477,000
McDermott International,
-- 297,600 297,600 Inc. -- 10,862,400 10,862,400
Smith International,
-- 148,200 148,200 Inc. (a) -- 11,513,287 11,513,287
------------
58,552,025
------------
FOOD & BEVERAGE--0.3%
Archer-Daniels Midland
-- 210,000 210,000 Co. -- 5,026,875 5,026,875
------------
HEALTHCARE SERVICES--
6.3%
-- 147,200 147,200 Aetna Inc. -- 11,987,600 11,987,600
Columbia/HCA Healthcare
-- 321,050 321,050 Corp. -- 9,230,188 9,230,188
628,700 -- 628,700 Healthsound Corp. (a) 16,778,431 -- 16,778,431
-- 110,000 110,000 Johnson & Johnson Co. -- 6,338,750 6,338,750
-- 94,300 94,300 Manor Care, Inc. -- 3,135,475 3,135,475
Novartis AG (ADR)
-- 285,000 285,000 (Switzerland) -- 21,980,625 21,980,625
536,000 -- 536,000 PhyCor, Inc. (a) 15,577,500 -- 15,577,500
Premier Research
-- 177,600 177,600 Worldwide, LTD. (a) -- 2,131,200 2,131,200
Sierra Health Services,
-- 130,000 130,000 Inc. (a) -- 4,761,250 4,761,250
-- 113,900 113,900 Sofamor/Danek Group Inc. -- 6,506,537 6,506,537
-- 280,000 280,000 Trigon Healthcare, Inc. -- 6,947,500 6,947,500
------------
105,375,056
------------
</TABLE>
3
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------ -------------------------------------
GROWTH MULTI-SECTOR PRO FORMA MULTI-SECTOR PRO FORMA
FUND FUND COMBINED DESCRIPTION GROWTH FUND FUND COMBINED
------ ------------ --------- ------------------------ ----------- ------------ ------------
<C> <C> <C> <S> <C> <C> <C>
HOTELS--2.3%
237,800 -- 237,800 Doubletree Corp. (a) $11,473,850 $ -- $ 11,473,850
541,200 250,600 791,800 Hilton Hotels Corp. 18,231,675 8,442,087 26,673,762
------------
38,147,612
------------
HOUSEHOLD & PERSONAL
CARE PRODUCTS--0.9%
176,700 -- 176,700 Gillete Co. 15,251,419 -- 15,251,419
------------
INDUSTRIAL
TECHNOLOGY/INSTRUMENTS--
7.0%
ADC Telecommunications,
-- 311,075 311,075 Inc. (a) -- 10,109,937 10,109,937
173,500 -- 173,500 Applied Materials, Inc. 16,525,875 -- 16,525,875
BDM International, Inc.
-- 345,700 345,700 (a) -- 8,685,713 8,685,713
-- 200,000 200,000 Cognizant Corp. -- 8,150,000 8,150,000
Comverse Technology,
-- 121,600 121,600 Inc. (a) -- 6,414,400 6,414,400
Glenayre Technologies,
-- 461,100 461,100 Inc. -- 7,723,425 7,723,425
248,500 -- 248,500 KLA Instruments Corp. (a) 16,789,281 -- 16,789,281
-- 319,600 319,600 Larscom, Inc. (a) -- 3,235,950 3,235,950
Symbol Technologies,
426,700 -- 426,700 Inc. 18,748,131 -- 18,748,131
-- 181,600 181,600 Uniphase Corp. (a) -- 14,437,200 14,437,200
Westell Technologies,
-- 266,550 266,550 Inc. (a) -- 5,914,078 5,914,078
------------
116,733,990
------------
INSURANCE--5.2%
82,900 -- 82,900 Cigna Corp. 15,440,125 -- 15,440,125
316,800 -- 316,800 MGIC Investment Corp. 18,156,600 -- 18,156,600
Mutual Risk Management,
327,533 -- 327,533 Ltd. 16,642,771 -- 16,642,771
Provident Companies,
218,300 -- 218,300 Inc. 15,267,356 -- 15,267,356
448,700 -- 448,700 UNUM Corp. 20,471,937 -- 20,471,937
------------
85,978,789
------------
LEISURE--0.8%
-- 144,000 144,000 Carnival Corp. -- 6,660,000 6,660,000
-- 309,400 309,400 La Quinta Inns, Inc. -- 7,290,238 7,290,238
Patriot American
-- 1 1 Hospitality Inc. -- 22 22
------------
13,950,260
------------
MACHINERY--0.8%
193,800 -- 193,800 Case Corp. 12,911,925 -- 12,911,925
------------
MEDIA--2.0%
Clear Channel
278,300 -- 278,300 Communications, Inc. (a) 18,054,712 -- 18,054,712
181,100 -- 181,100 Walt Disney Co. (The) 14,601,188 -- 14,601,188
------------
32,655,900
------------
NETWORKING--7.5%
533,200 455,000 988,200 3Com Corp. (a) 27,326,500 23,318,750 50,645,250
-- 440,000 440,000 Bay Networks, Inc. -- 16,995,000 16,995,000
512,000 269,200 781,200 Cisco Systems, Inc. (a) 37,408,000 19,668,425 57,076,425
------------
124,716,675
------------
</TABLE>
4
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
---------------------------------- -------------------------------------
MULTI-SECTOR PRO FORMA MULTI-SECTOR PRO FORMA
GROWTH FUND FUND COMBINED DESCRIPTION GROWTH FUND FUND COMBINED
----------- ------------ --------- ------------------------ ----------- ------------ ------------
<C> <C> <C> <S> <C> <C> <C>
OIL & GAS-
PRODUCTION/PIPELINE--
0.6%
-- 55,000 55,000 Coflexip (a) $ -- $ 3,093,750 $ 3,093,750
Pioneer Natural
-- 162,600 162,600 Resources Co. -- 6,808,875 6,808,875
------------
9,902,625
------------
OIL SERVICES--3.1%
368,600 244,000 612,600 Schlumberger Ltd. 31,031,512 20,541,750 51,573,262
------------
PHARMACEUTICALS--8.6%
Boston Scientific Corp.
150,200 162,100 312,300 (a) 8,289,163 8,945,894 17,235,057
246,100 -- 246,100 Bristol-Myers Squibb Co. 20,364,775 -- 20,364,775
224,400 -- 224,400 Eli Lilly & Co. 27,026,175 -- 27,026,175
689,200 -- 689,200 Pfizer, Inc. 41,395,075 -- 41,395,075
Smithkline Beecham, PLC
(ADR)
523,700 -- 523,700 (United Kingdom) 25,595,837 -- 25,595,837
91,100 -- 91,100 Warner-Lambert Co. 12,292,806 -- 12,292,806
------------
143,909,725
------------
PRECIOUS METALS--0.9%
UCAR International, Inc.
-- 318,700 318,700 (a) -- 15,217,925 15,217,925
------------
RETAIL--8.5%
216,100 -- 216,100 AutoZone, Inc. (a) 6,483,000 -- 6,483,000
Corporate Express, Inc.
662,500 -- 662,500 (a) 13,995,313 -- 13,995,313
-- 102,000 102,000 CVS Corp. -- 5,801,250 5,801,250
455,925 -- 455,925 Dollar General Corp. 15,529,945 -- 15,529,945
355,600 -- 355,600 Gap, Inc. 17,802,225 -- 17,802,225
207,600 -- 207,600 Home Depot, Inc. 10,821,150 -- 10,821,150
249,700 -- 249,700 Kohl's Corp 17,728,700 -- 17,728,700
-- 460,000 460,000 Limited Inc. (The) -- 11,241,250 11,241,250
-- 171,600 171,600 Nordstrom, Inc. -- 10,939,500 10,939,500
Quality Food Centers,
-- 84,700 84,700 Inc. (a) -- 3,467,406 3,467,406
336,800 -- 336,800 Sears, Roebuck & Co. 19,176,550 -- 19,176,550
-- 250,500 250,500 Toys "R" Us, Inc. (a) -- 8,892,750 8,892,750
------------
141,879,039
------------
TELECOMMUNICATIONS
EQUIPMENT--4.7%
190,400 -- 190,400 Ciena Corp. (a) 9,430,750 -- 9,430,750
286,600 -- 286,600 Motorola, Inc. 20,599,375 -- 20,599,375
242,500 -- 242,500 Nokia Corp. (ADR)(Finland) 22,749,531 -- 22,749,531
Premisys Communications
-- 300,000 300,000 Inc. -- 7,631,250 7,631,250
287,100 60,000 347,100 Tellabs, Inc. 14,785,650 3,090,000 17,875,650
------------
78,286,556
------------
TELECOMMUNICATIONS
SERVICES--1.0%
AirTouch Communications
437,800 -- 437,800 Inc. (a) 15,514,538 -- 15,514,538
RSL Communications, Ltd.
15,000 -- 15,000 (a) 330,000 -- 330,000
------------
15,844,538
------------
</TABLE>
5
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
---------------------------------- ----------------------------------------
MULTI-SECTOR PRO FORMA MULTI-SECTOR PRO FORMA
GROWTH FUND FUND COMBINED DESCRIPTION GROWTH FUND FUND COMBINED
----------- ------------ --------- ------------------------ ----------- ------------ --------------
<C> <C> <C> <S> <C> <C> <C>
TRANSPORTATION--0.6%
-- 341,400 341,400 OMI Corp. $ -- $ 4,267,500 $ 4,267,500
-- 150,000 150,000 USAir Group, Inc.(a) -- 6,206,250 6,206,250
--------------
10,473,750
--------------
TRUCKING & SHIPPING--
1.3%
278,100 -- 278,100 Federal Express Corp. (a) 22,248,000 -- 22,248,000
--------------
Total Long-Term
Investments
(cost $1,218,547,339) 1,640,114,927
--------------
<CAPTION>
PRINCIPAL AMOUNT (000)
----------------------------------
<C> <C> <C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS--
1.6%
COMMERCIAL PAPER--0.6%
Ford Motor Credit Co.
$10,159 $ -- $10,159 6.15%, 10/1/97 10,159,000 10,159,000
REPURCHASE AGREEMENT--
1.0%
Joint Repurchase
-- 16,322 16,322 Agreement Account 16,322,000 16,322,000
--------------
TOTAL SHORT -TERM
INVESTMENTS
(cost $26,481,000) 26,481,000
--------------
TOTAL INVESTMENTS BEFORE
SHORT SALES--99.9%
(cost $1,245,028,339) 1,666,595,927
--------------
<CAPTION>
SHARES
----------------------------------
<C> <C> <C> <S> <C> <C> <C>
COMMON STOCK SOLD SHORT
(A)--(1.9%)
APPAREL--(0.2%)
-- 50,000 50,000 Nike Inc. -- (2,650,000) (2,650,000)
--------------
COMPUTER
SYSTEMS/PERIPHERALS--
(0.9%)
-- 160,500 160,500 Applied Magnet -- (5,055,750) (5,055,750)
-- 210,000 210,000 Gateway 2000 Inc. -- (6,601,875) (6,601,875)
-- 75,000 75,000 Seagate Tech. Inc. -- (2,709,375) (2,709,375)
--------------
(14,367,000)
--------------
EDUCATION--(0.1%)
-- 25,000 25,000 Apollo Group Inc. -- (1,059,375) (1,059,375)
--------------
RETAILING--(0.4%)
-- 100,000 100,000 General Nutrition Co. -- (2,912,500) (2,912,500)
Cracker Barrel Old
-- 118,000 118,000 Country Store, Inc. -- (3,820,250) (3,820,250)
--------------
(6,732,750)
--------------
TECHNOLOGY SECTOR--
(0.2%)
-- 12,500 12,500 Aware, Inc. -- (157,812) (157,812)
Hutchinson Technology,
-- 58,400 58,400 Inc. -- (1,960,050) (1,960,050)
-- 50,000 50,000 Innovex, Inc. -- (1,612,500) (1,612,500)
--------------
(3,730,362)
--------------
</TABLE>
6
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
---------------------------------- ---------------------------------------
MULTI-SECTOR PRO FORMA MULTI-SECTOR PRO FORMA
GROWTH FUND FUND COMBINED DESCRIPTION GROWTH FUND FUND COMBINED
----------- ------------ --------- ------------------------ ----------- ------------ --------------
<C> <C> <C> <S> <C> <C> <C>
TELECOMMUNICATIONS
EQUIPMENT--(0.1%)
-- 100,000 100,000 Broadband Technology $-- $(850,000) $ (850,000)
--------------
Total common stocks sold
short
(proceeds $27,764,397) (29,389,487)
--------------
TOTAL INVESTMENTS, NET
OF SHORT SALES--98.1% 1,637,206,440
Other assets in excess
of liabilities--1.9% 31,506,758
--------------
Net Assets--100% $1,668,713,198
==============
</TABLE>
- --------
(a) Non-income producing security.
ADR--American Depository Receipt
7
<PAGE>
Pro Forma Statement of Assets and Liabilities
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
MULTI-SECTOR PRO FORMA PRO FORMA
GROWTH FUND FUND ADJUSTMENTS COMBINED
-------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Assets
Investments, at value
(cost $863,162,444,
$381,865,895 and
$1,245,028,339,
respectively).......... $1,196,939,929 $469,655,998 $1,666,595,927
Cash.................... 1,132,392 4,928 1,137,320
Receivable for
investments sold....... 5,014,392 9,763,352 14,777,744
Receivable for Fund
shares sold............ 4,739,703 104,632 4,844,335
Deposits with broker for
securities sold short.. -- 20,220,643 20,220,643
Dividend and interest
receivable............. 652,640 497,855 1,150,495
Other assets............ 135,543 11,446 146,989
-------------- ------------ ------ --------------
Total assets.......... 1,208,614,599 500,258,854 1,708,873,453
-------------- ------------ ------ --------------
Liabilities
Payable for investments
purchased.............. 6,036,257 -- 6,036,257
Payable for Fund shares
reacquired............. 1,919,751 705,802 2,625,553
Investments sold short,
at value (proceeds
$27,764,397)........... -- 29,389,487 29,389,487
Management fee payable.. 570,278 238,175 808,453
Distribution fee
payable................ 378,572 208,421 586,993
Accrued expenses........ 262,783 433,631 696,414
Withholding taxes
payable................ 17,098 -- 17,098
-------------- ------------ ------ --------------
Total liabilities..... 9,184,739 30,975,516 40,160,255
-------------- ------------ ------ --------------
Net Assets.............. $1,199,429,860 $469,283,338 $1,668,713,198
============== ============ ====== ==============
Net investment assets
were comprised of:
Shares of common
stock, at par........ $ 78,191 $ 28,921 1,716 (a) $ 108,828
Paid-in capital in
excess of par........ 784,299,181 317,167,599 (1,716)(a) 1,101,465,064
-------------- ------------ ------ --------------
784,377,372 317,196,520 1,101,573,892
Undistributed net
investment income...... -- 73,453 73,453
Accumulated net realized
gain on investments and
foreign currency....... 81,276,520 65,848,352 147,124,872
Net unrealized
appreciation on
investments............ 333,775,968 86,165,013 419,940,981
-------------- ------------ ------ --------------
Net Assets, September
30, 1997............... $1,199,429,860 $469,283,338 $1,668,713,198
============== ============ ====== ==============
Class A:
Net asset value and
redemption price per
share................ $ 15.39 $ 16.41 $ 15.39
Maximum sales charge
(5% of offering
price)............... 0.81 0.86 0.81
-------------- ------------ ------ --------------
Maximum offering price
to public............ $ 16.20 $ 17.27 $ 16.20
============== ============ ====== ==============
Class B:
Net asset value,
offering price and
redemption price per
share................ $ 15.18 $ 15.91 $ 15.18
============== ============ ====== ==============
Class C:
Net asset value,
offering price and
redemption price per
share................ $ 15.18 $ 15.90 $ 15.18
============== ============ ====== ==============
Class Z:
Net asset value,
offering price and
redemption price per
share................ $ 15.45 $ 16.46 $ 15.45
============== ============ ====== ==============
</TABLE>
- --------
(a) Adjustment to reflect the exchange of shares of common stock from Multi-
Sector Fund to the Growth Fund.
See Notes to Financial Statements
8
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GROWTH MULTI-SECTOR PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends (net of
foreign withholding
taxes of $185,509 and
$96,008 and $281,517,
respectively)......... $ 6,429,231 $ 5,345,499 $ 11,774,730
Interest............... 967,368 1,370,498 2,337,866
------------ ------------ ------------
Total Income.......... 7,396,599 6,715,997 14,112,596
------------ ------------ ------------
Expenses
Management Fee......... 5,276,337 2,835,757 (113,430)(a) 7,998,664
Distribution fee-Class
A..................... 264,954 555,804 820,758
Distribution fee-Class
B..................... 2,994,762 2,083,043 5,077,805
Distribution fee-Class
C..................... 182,481 46,225 228,706
Transfer agent's fees
and expenses.......... 1,376,000 846,000 (111,100)(b) 2,110,900
Custodian's fees and
expenses.............. 128,000 199,000 (157,000)(b) 170,000
Reports to
shareholders.......... 235,000 322,000 (257,000)(b) 300,000
Registration fees...... 233,000 90,000 (73,000)(b) 250,000
Legal fees and
expenses.............. 65,000 40,000 (35,000)(b) 70,000
Audit fee and expenses. 20,000 36,000 (16,000)(b) 40,000
Amortization of
deferred organization
expense............... 37,967 -- 37,967
Directors' fee and
expenses.............. 10,500 26,250 (26,250)(b) 10,500
Insurance expense...... 12,000 -- 12,000
Miscellaneous.......... 11,912 19,570 (19,482)(b) 12,000
------------ ------------ -------- ------------
Total expenses........ 10,847,913 7,099,649 (808,262) 17,139,300
------------ ------------ -------- ------------
Net investment loss..... (3,451,314) (383,652) 808,262 (3,026,704)
------------ ------------ -------- ------------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND
FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss)
on:
Investment
transactions.......... 90,453,012 96,442,926 186,895,938
Foreign currency
transactions.......... -- (229,650) (229,650)
Short sale
transactions.......... -- (7,543,755) (7,543,755)
------------ ------------ ------------
90,453,012 88,669,521 179,122,533
------------ ------------ ------------
Net change in unrealized
appreciation
(depreciation) on:
Investments............ 224,732,097 26,499,913 251,232,010
Short sales............ -- (969,227) (969,227)
Foreign currency
transactions.......... -- (368,743) (368,743)
------------ ------------ ------------
224,732,097 25,161,943 249,894,040
------------ ------------ ------------
Net gain on investments
and foreign currency
transactions........... 315,185,109 113,831,464 429,016,573
------------ ------------ ------------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............. $311,733,795 $113,447,812 $808,262 $425,989,869
============ ============ ======== ============
</TABLE>
- --------
(a) Adjustment to reflect reduction in management fee.
(b) Adjustment to reflect elimination of duplicative expenses.
See Notes to Financial Statements
9
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
Prudential Jennison Growth Fund (the "Growth Fund") 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 Growth Fund's investment objective is to achieve long-term growth of
capital. It invests primarily in equity securities (common stock, preferred
stock and securities convertible into common stock) of established companies
with above-average growth prospects.
The preceding are pro forma financial statements which give effect to the
following proposed transaction whereby all of the assets of Prudential Multi-
Sector Fund, Inc. ("Multi-Sector Fund") will be exchanged for the shares of
the Growth Fund and the Growth Fund will assume the liabilities of the Multi-
Sector Fund. Immediately after the exchange, shares of the Growth Fund will be
distributed to shareholders of the Multi-Sector Fund and the Multi-Sector Fund
will be liquidated. The preceding pro forma financial statements include a pro
forma Portfolio of Investments at September 30, 1997, a pro forma Statement of
Assets and Liabilities at September 30, 1997, and a pro forma Statement of
Operations for the 12 months ended September 30, 1997.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Growth Fund 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 mean between
the closing bid and asked prices on such day or at the bid price in the
absence of an asked price, 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 mean between the most recently quoted bid and asked prices
provided by a principal market maker or independent pricing agent. Options on
securities and indices traded on an exchange are valued at the mean between
the most recently quoted bid and asked prices provided by the respective
exchange. Futures contracts and options thereon are valued at the last sales
price as of the close of business of the exchange. Securities for which 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
10
<PAGE>
recorded on the ex-dividend date; interest income is recorded on the accrual
basis and is net of discount accretion and premium amortization. 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 Growth Fund expects to pay dividends of net
investment income, if any, semi-annually and to make distributions of any net
capital gains at least annually. Dividends and distributions are recorded on
the ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
Taxes: It is the Growth Fund's policy to continue to meet the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Growth Fund's understanding of the applicable country's tax rules and
rates.
Deferred Organization Expenses: Approximately $200,000 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 Growth Fund commenced investment operations.
Reorganization and Solicitation Expense: Expenses of reorganization and
solicitation will be borne by the Multi-Sector Fund and the Growth Fund in
proportion to their respective assets and will include reimbursement of
brokerage firms and others for expenses in forwarding proxy solicitation
material to shareholders.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund
Management LLC ("PIFM"). Pursuant to a subadvisory agreement between PIFM and
Jennison Associates LLC ("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 Growth Fund in accordance with its investment
objective 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 Growth
Fund. PIFM pays Jennison a subadvisory fee at an annual rate of .30 of 1% of
the average daily net assets of the Growth Fund 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.
11
<PAGE>
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
fiscal year ended September 30, 1997.
PIFM, Jennison and PSI are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
NOTE 3. SALES OF PORTFOLIO HOLDINGS
In connection with the proposed transaction, the portfolio manager of the
Growth Fund anticipates selling certain of the portfolio holdings of Multi-
Sector Fund. The particular securities to be liquidated have not yet been
determined.
12
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Statement of Additional Information dated January 23, 1998
Prudential Jennison Series Fund, Inc. (the Company) is an open-end,
diversified, management investment company consisting of three series:
Prudential Jennison Active Balanced Fund (Active Balanced Fund), Prudential
Jennison Growth Fund (Growth Fund) and Prudential Jennison Growth & Income
Fund (Growth & Income Fund) (each a Fund and collectively the Funds).
The investment objective of 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.
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.
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, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Funds' Prospectus, dated January 23, 1998, copies
of which may be obtained from the Company upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE TO PAGE
PAGE IN PROSPECTUS
---------------- -----------------------
<S> <C> <C>
General Information................... B-2 38
Investment Objectives and Policies.... B-2 18
Investment Restrictions............... B-18 32
Directors and Officers................ B-21 32
Manager and Subadvisers............... B-25 32
Distributor........................... B-27 33
Portfolio Transactions and Brokerage.. B-29 35
Purchase and Redemption of Fund
Shares............................... B-31 39
Shareholder Investment Account........ B-34 50
Net Asset Value....................... B-38 35
Taxes, Dividends and Distributions.... B-39 36
Performance Information............... B-42 36
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants.......................... B-45 35
Financial Statements.................. B-46 --
Report of Independent Accountants..... B-56, B-66, B-77 --
Independent Auditors' Report.......... B-57, B-67
Description of Security Ratings....... A-1 --
Appendix I--General Investment
Information.......................... I-1 --
Appendix II--Historical Performance
Data................................. II-1 --
Appendix III--Information Relating to
Prudential........................... III-1 --
</TABLE>
MF172B
<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 (Growth & Income Fund). The existing series of the Company was
redesignated Prudential Jennison Growth Fund (Growth Fund). On August 27,
1997, the Company added a third series, Prudential Jennison Active Balanced
Fund (Active Balanced Fund). Active Balanced Fund did not commence operations
until January 23, 1998, when it acquired the assets of Prudential Active
Balanced Fund, a series of Prudential Index Series Fund (formerly Prudential
Dryden 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 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 objective of the Growth Fund is long-term
growth of capital. The Growth Fund seeks to achieve this objective by
investing primarily in equity securities (common stock, preferred stock and
securities convertible into common stock) of established companies with above-
average growth prospects. Current income, if any, is incidental. Under normal
market conditions, the Growth Fund intends to invest at least 65% of its total
assets in equity securities of companies that exceed $1 billion in market
capitalization. The primary investment objective of the Growth & Income Fund
is long-term growth of capital and income, with current income as a secondary
objective. The Growth & Income Fund seeks to achieve its objectives by
investing primarily in common stocks of established companies with growth
prospects believed to be underappreciated by the market. See "How the Funds
Invest--Investment Objectives and Policies" in the Prospectus. There can be no
assurance that the Funds' investment objectives will be achieved.
The term "investment adviser" refers to Jennison Associates LLC, the
Subadviser. See "Manager and Subadvisers" 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 Active Balanced 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 a 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
B-6
<PAGE>
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.
B-7
<PAGE>
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
B-8
<PAGE>
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.
B-9
<PAGE>
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.
B-10
<PAGE>
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 contracts 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.
B-11
<PAGE>
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, foreign currencies, 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.
B-12
<PAGE>
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 Fund 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 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 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.
B-14
<PAGE>
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. As a matter of current operating policy, the Growth
Fund will not engage in short sales other than short sales against-the-box.
The Growth & Income Fund will engage in short sales, including short sales
against-the-box. See "How the Funds Invest--Other Investments and Policies--
Short Sales" in the Prospectus and "Investment Restrictions" below.
REPURCHASE AGREEMENTS
Each Fund's repurchase agreements will be collateralized by U.S. Government
obligations. A Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Company's Board of
Directors. The investment adviser will monitor the creditworthiness of such
parties under the general supervision of the Board of Directors of the
Company. In the event of a default or bankruptcy by a seller, a Fund will
promptly seek to liquidate the
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 FUND 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. 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 in an amount 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. 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 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 (73) 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 (51) Director Vice President, 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) and President
(58) (since September 1997) of Gannett Co. Inc.
(publishing and media); Director of Gannett Co.
Inc., Frontier Corporation and Continental
Airlines, Inc.
*Mendel A. Melzer, CFA Director Chief Investment Officer (since October 1996) of
(38) Prudential Mutual Funds & Annuities; formerly
751 Broad St. Chief Financial Officer (November 1995-
Newark, NJ 07102 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 (56) 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 (55) 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 (54) 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 (58) 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 (56) 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>
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. Morrison Assistant Secretary Vice President (since December 1996) of PIFM;
(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 Subadvisers" and "Distributor," oversee such actions and decide
on general policy.
Pursuant to each 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 LLC (Jennison or the Subadviser) annual
compensation of $1,875, 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
B-23
<PAGE>
rate) or, pursuant to an 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, 1997. 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 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1997
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 $1,875 None N/A $135,000(38/63)*
Gold, Delayne D.--Direc-
tor $1,875 None N/A $135,000(38/63)*
Gunia, Robert F.(/1/)--
Director $ 0 None N/A $ 0
Lennox, Donald D.--For-
mer Director $1,875 None N/A $ 90,000(26/50)*
McCorkindale, Douglas
H.(/2/)--Director $1,875 None N/A $ 70,000(20/35)*
Melzer, Mendel A.(/1/)--
Director $ 0 None N/A $ 0
Mooney, Thomas T.(/2/)--
Director $1,875 None N/A $115,000(31/64)*
Munn, Stephen P.--Direc-
tor $1,875 None N/A $ 45,000(15/21)*
Redeker, Richard
A.(/1/)--President and
Director $ 0 None N/A $ 0
Smith, Robin B.(/2/)--
Director $3,750 None N/A $ 90,000(27/34)*
Weil, III, Louis A.--Di-
rector $1,875 None N/A $ 90,000(26/50)*
Whitehead, Clay T.--Di-
rector $1,875 None N/A $ 45,000(15/21)*
</TABLE>
- -------
* Indicates number of funds/portfolios in Fund Complex (including the Company)
to which aggregate compensation relates.
(1) Directors who are "interested" do not receive compensation from the Fund
Complex (including the Company).
(2) Total compensation from all the funds in the Fund Complex for the calendar
year ended December 31, 1997, including amounts deferred at the election
of Directors under the funds' deferred compensation plans. Including
accrued interest, total deferred compensation amounted to $71,640,
$143,909 and $139,097 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively. Currently, Ms. Smith has agreed to defer her fees at the
Fund rate.
As of January 9, 1998, the Directors and officers of the Company, as a group,
owned less than 1% of the outstanding common stock of each Fund.
As of January 9, 1998, Jennison Associates LLC Savings Plan, TTEE J. Kannry,
M. Del Balso & 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 160,307 and 147,215
Class A shares of the Growth & Income Fund (5.6% and 5.2%, 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
B-24
<PAGE>
08/25/95, 500 Laramie Trl., Cincinnati, OH 45215-2504, Mr. Neil L. Cushman &
Mrs. Katy L. Cushman, JT TEN, 5248 Calle Barquero, Santa Barbara, CA 93111-
1743 and Mr. Albert R. Graves & Mrs. R. Graves, JT TEN, 790 Cool Glace Ct.,
Millersville, MD 21108-1700 were the beneficial owners of 11,006, 5,106, 5,940
and 4,164 Class Z shares of the Growth & Income Fund (14%, 6.5%, 7.5% and
5.3%, 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
14,582,896 and 29,673,849 Class Z shares of the Growth Fund (29% and 60.1%,
respectively).
As of January 9, 1998, Prudential Securities was the record holder for other
beneficial owners of 6,977,021 Class A shares (approximately 63.6% of such
shares outstanding), 21,841,735 Class B shares (approximately 67.1% of such
shares outstanding), 1,612,029 Class C shares (approximately 78.9% of such
shares outstanding) and 389,471 Class Z shares (approximately 0.7% of such
shares outstanding) of Growth Fund; and 2,178,948 Class A shares
(approximately 76% of such shares outstanding), 6,214,520 Class B shares
(approximately 82.8% of such shares outstanding), 564,829 Class C shares
(approximately 89.8% of such shares outstanding) and 67,276 Class Z shares
(approximately 85.8% 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 Funds are Managed--Manager" in the Prospectus. As of December 31,
1997, PIFM managed and/or administered open-end and closed-end management
investment companies with assets of approximately $62 billion. According to
the Investment Company Institute, as of October 31, 1997, the Prudential
Mutual Funds were the 17th largest family of mutual funds in the United
States.
PIFM is a subsidiary of Prudential Securities. 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's and Growth & Income
Fund's average daily net assets and a fee at an annual rate of .65 of 1% of
the Active 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
B-25
<PAGE>
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.
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
B-26
<PAGE>
of the Growth Fund 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 $2,348,474 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 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 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.
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
B-27
<PAGE>
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 period ended September 30, 1997, the Distributor
received $2,994,762 and $560,606 on behalf of the Growth Fund and Growth &
Income Fund, respectively, under the Class B Plan. For the fiscal period ended
September 30, 1997, the Distributor spent approximately the following amounts
on behalf of each such Fund.
<TABLE>
<CAPTION>
APPROXIMATE
COMMISSION COMPENSATION TO TOTAL
PAYMENTS TO PRUSEC FOR AMOUNT
FINANCIAL COMMISSION SPENT BY
ADVISERS OF OVERHEAD COSTS PAYMENTS TO DISTRIBUTOR
PRUDENTIAL OF PRUDENTIAL REPRESENTATIVES AND ON BEHALF OF
FUND PRINTING SECURITIES SECURITIES* OTHER EXPENSES* FUND
- -------- -------- ----------- -------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Growth $335,000 $1,611,600 $1,197,200 $1,448,300 $4,592,100
Growth &
Income $ 0 $ 357,900 $ 787,400 $ 281,500 $1,426,800
</TABLE>
Prudential Securities also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the same periods, Prudential Securities
received approximately $727,100 and $124,500 in contingent deferred sales
charges attributable to Class B shares of Growth Fund and Growth & Income
Fund, respectively.
Class C Plan. For the fiscal period ended September 30, 1997, the Distributor
received $182,481 and $50,452 on behalf of the Growth Fund and Growth & Income
Fund, respectively, under the Class C Plan. For the fiscal period ended
September 30, 1997, the Distributor spent approximately the following amounts
on behalf of each such Fund.
<TABLE>
<CAPTION>
APPROXIMATE
COMMISSION COMPENSATION TO TOTAL
PAYMENTS TO PRUSEC FOR AMOUNT
FINANCIAL COMMISSION SPENT BY
ADVISERS OF OVERHEAD COSTS PAYMENTS TO DISTRIBUTOR
PRUDENTIAL OF PRUDENTIAL REPRESENTATIVES AND ON BEHALF OF
FUND PRINTING SECURITIES SECURITIES* OTHER EXPENSES* FUND
- -------- -------- ----------- -------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Growth $19,700 $135,100 $30,800 $14,300 $199,900
Growth &
Income $ 0 $ 17,800 $24,400 $ 1,800 $ 44,000
</TABLE>
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
B-28
<PAGE>
Charges" in the 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.
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.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit aggregate
initial sales charges, deferred sales charges and asset-based sales charges to
6.25% of total gross sales of each class of shares. In the case of Class B
shares, interest charges equal to the prime rate plus one percent per annum
may be added to the 6.25% limitation. Sales from the reinvestment of dividends
and distributions are not required to be included in the calculation of the
6.25% limitation. The annual asset-based sales charge with respect to Class B
and Class C shares of the Fund may not exceed .75 of 1%. The 6.25% limitation
applies to 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
B-29
<PAGE>
any transaction in which Prudential Securities or any affiliate acts as
principal, except in accordance with rules of the SEC. Thus, it will not deal
with Prudential Securities acting as market maker, and it will not execute a
negotiated trade with Prudential Securities if execution involves Prudential
Securities' acting as principal with respect to any part of a Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Company, will not significantly affect a
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, a Fund may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not
subject to such limitations.
In placing orders for portfolio securities of a Fund, the Manager is required
to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio
transactions of a Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. Such services are
used by the Manager in connection with all of its investment activities, and
some of such services obtained in connection with the execution of
transactions for a Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than a Fund's, and the
services furnished by such brokers, dealers or futures commission merchants
may be used by the Manager in providing investment management for a Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker in the light of generally prevailing
rates. The Manager's policy is to pay higher commissions to brokers, other
than Prudential Securities, for particular transactions than might be charged
if a different broker had been selected, on occasions when, in the Manager's
opinion, this policy furthers the objective of obtaining best price and
execution. In addition, 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
B-30
<PAGE>
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 its
affiliates. The Growth & Income Fund paid commissions of $298,280 for the
fiscal period ended September 30, 1997, of which $13,935 was paid to
Prudential Securities or its affiliates.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares of
each Fund are offered to a limited group of investors at net asset value
without any sales charges. See "Shareholder Guide--How to Buy Shares of the
Funds" in the Prospectus.
Each class represents an interest in the same assets of a Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales 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."
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the applicable Fund, (b) are liquid and not subject
to restrictions on resale, and (c) have a value that is readily ascertainable
via listing on or trading in a recognized United States or international
exchange or market.
B-31
<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 at September 30, 1997, the maximum offering price of the
Funds' shares is as follows:
<TABLE>
<CAPTION>
ACTIVE GROWTH
BALANCED & INCOME
FUND** GROWTH FUND FUND
-------- ----------- --------
<S> <C> <C> <C>
CLASS A
Net asset value and redemption price per Class A
share........................................... $14.41 $15.39 $12.89
Maximum sales charge (5% of offering price)...... .76 .81 .68
------ ------ ------
Offering price to public......................... $15.17 $16.20 $13.57
====== ====== ======
CLASS B
Net asset value, redemption price and offering
price per Class B share*........................ $14.34 $15.18 $12.86
====== ====== ======
CLASS C
Net asset value, redemption price and offering
price per Class C share*........................ $14.34 $15.18 $12.86
====== ====== ======
CLASS Z
Net asset value, offering price and redemption
price per Class Z share......................... $14.45 $15.45 $12.93
====== ====== ======
</TABLE>
- -------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
**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 the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more 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-32
<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 price (net asset value plus maximum
sales charge) as of the previous business day. See "How Each Fund Values its
Shares" in the Prospectus. The Distributor must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charges will be granted subject to confirmation of the investor's
holdings. Rights of Accumulation are not available to individual participants
in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of a Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may
also qualify to purchase Class A shares at net asset value by entering into a
Letter of Intent whereby they agree to enroll, within a thirteen month period,
a specified number of eligible employees or participants (Participant Letter
of Intent).
For purposes of the Investment Letter of Intent, all shares of a Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period, and in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the
reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent,
each investment made during the period will be made at net asset value.
Escrowed Class A shares totaling 5% of the dollar amount of the Letter of
Intent will be held by the Transfer Agent in the name of the purchaser, except
in the case of retirement and group plans where the employer or plan sponsor
will be responsible for paying any applicable sales charge. The effective date
of an Investment Letter of Intent (except in the case of retirement and group
plans) may be back-dated up to 90 days, in order that any investments made
during this 90-day period, valued at the purchaser's cost, can be applied to
the fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Company to sell, the indicated amount. Similarly, the Participant
Letter of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference 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-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 charges will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to
individual participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit
the supporting documentation set forth below.
<TABLE>
<C> <S>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust, a
copy of the grantor's death certificate,
plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she Administration award letter or a letter
is unable to engage in any sub- from a physician on the physician's
stantial gainful activity by letterhead stating that the shareholder
reason of any medically deter- (or, in the case of a trust, the grantor)
minable physical or mental im- is permanently disabled. The letter must
pairment which can be expected also indicate the date of disability.
to result in death or to be of
long-continued and indefinite
duration.
Distribution from an IRA or A copy of the distribution form from the
403(b) Custodial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is
taking a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA)
or the plan administrator/trustee on
company letterhead indicating the amount of
the excess and whether or not taxes have
been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as
it may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account is
established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must
be requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. Each Fund makes
available to its shareholders the following privileges and plans.
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-34
<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-35
<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-36
<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 the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any gain
or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares
are inadvisable 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-37
<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 a traditional IRA account will be subject to tax when
withdrawn from the account. Distributions from a Roth IRA which meet the
conditions required under the Internal Revenue Code will not be subject to
tax upon withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, 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-38
<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-39
<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 one year except in certain cases where the Fund acquires a put or
writes a call thereon or makes a short sale against-the-box. Other gains or
losses on the sale of securities will be short-term capital gains or losses.
Gains and losses on the sale, lapse or other termination of options on
securities will generally be treated as gains and losses from the sale of
securities (assuming they do not qualify as Section 1256 contracts). If an
option written by a Fund on securities lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will generally realize short-term capital gain or loss. If
securities are sold by a Fund pursuant to the exercise of a call option
written by it, the Fund will include the premium received in the sale proceeds
of the securities delivered in determining the amount of gain or loss on the
sale. Certain of a Fund's transactions may be subject to wash sale, short
sale, 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. A Fund may make a "mark-to-market"
election with respect to any marketable stock it holds of a PFIC. If the
election is in effect, at the end of the Fund's taxable year, the Fund will
recognize the amount of gains, if any, with respect to PFIC stock. No loss
will be recognized on PFIC stock, except to the extent of gains recognized in
prior years. 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-40
<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-41
<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 Prospectus.
Average annual total return is computed according to the following formula:
P ( 1 + T ) to the nth power = 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 21.99% and 33.28%, 22.68% and 34.39%, 24.41% and
38.39%, 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
31.85% and 40.71%, respectively.
On September 20, 1996, the assets and liabilities of Growth Stock Fund (a
series of Prudential Index Series Fund, formerly Prudential Dryden Fund, and
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 40.71%, 28.90% and 21.37%, respectively. In addition, the aggregate total
returns for such periods would have been 40.71%, 114.22% and 158.39%,
respectively.
B-42
<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 virtually 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 17.48%. 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 16.91%. 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 16.91%. 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
21.34% and 73.98%, respectively. Your aggregate total returns for such periods
would have been 21.34% and 12.40%, respectively.
AGGREGATE TOTAL RETURN. A Fund may also advertise its aggregate total return.
Aggregate total return is determined separately for Class A, Class B, Class C
and Class Z shares. See "How the Funds Calculate Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in a Fund and is computed according to the following formula:
ERV - P
-----
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state income
taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges. The aggregate total returns for the period
from November 2, 1995 (commencement of investment operations) 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-43
<PAGE>
From time to time, the performance of a Fund may be measured against various
indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of
inflation.(1)
[CHART]
PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS
OVER THE LONG TERM (1/1926 - 9/1997)
Common Stocks 11.0%
Long-Term
Gov't Bonds 5.1%
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 and Poor's 500 Stock Index, a market-weighted, unmanaged index of 500
common stocks in a variety of industry sectors. It is a commonly used
indicator of broad stock price movements. This chart is for illustrative
purposes only and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
B-44
<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.
B-45
<PAGE>
Portfolio of Investments as PRUDENTIAL DRYDEN FUND
of September 30, 1997 PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Shares Description Value (Note 1)
- ----------------------------------------------------------------
LONG-TERM INVESTMENTS--90.7%
COMMON STOCKS--50.8%
- ----------------------------------------------------------------
Airlines--0.6%
10,600 Delta Air Lines, Inc. $ 998,388
- ----------------------------------------------------------------
Automobiles & Trucks--2.7%
61,800 General Motors Corp. 4,136,737
4,700 Meritor Automotive Inc.(a) 112,495
-------------
4,249,232
- ----------------------------------------------------------------
Banking--3.2%
14,400 Chase Manhattan Corp. 1,699,200
14,500 Fleet Financial Group, Inc. 950,656
142,200 Hibernia Corp. U.A. 2,417,400
-------------
5,067,256
- ----------------------------------------------------------------
Business Services--4.3%
40,975 CUC International Inc.(a) 1,270,225
25,000 Hertz Corp 942,187
20,300 Manpower, Inc. 801,850
50,200 Ogden Corp. 1,185,975
8,600 Omnicom Group 625,650
58,800 Ryder System, Inc. 2,113,125
-------------
6,939,012
- ----------------------------------------------------------------
Computer Systems/Peripherals--4.1%
18,400 Digital Equipment Corp.(a) 796,950
20,000 Hewlett-Packard Co. 1,391,250
25,700 International Business Machines
Corp. 2,722,594
21,550 Symbol Technologies, Inc. 946,853
48,100 Unisys Corp.(a) 736,531
-------------
6,594,178
- ----------------------------------------------------------------
Food--1.2%
42,900 Dole Food Company, Inc. 1,938,544
- ----------------------------------------------------------------
Hotels--0.9%
41,000 Hilton Hotels Corp. $ 1,381,188
- ----------------------------------------------------------------
Household & Personal Care Products--0.5%
44,300 The Dial Corp. 772,481
- ----------------------------------------------------------------
Insurance--2.8%
16,800 CIGNA Corp. 3,129,000
27,600 NAC Re Corp. 1,417,950
-------------
4,546,950
- ----------------------------------------------------------------
Machinery--1.0%
16,800 Case Corp. 1,119,300
9,400 Caterpillar Inc. 507,012
-------------
1,626,312
- ----------------------------------------------------------------
Media--0.7%
43,200 Westinghouse Electric Corp. 1,169,100
- ----------------------------------------------------------------
Metals--2.2%
47,700 Alumax, Inc.(a) 1,949,738
22,900 Reynolds Metals Co. 1,621,606
-------------
3,571,344
- ----------------------------------------------------------------
Oil Services--2.0%
25,300 Baker Hughes, Inc. 1,106,875
25,600 Dresser Industries, Inc. 1,100,800
21,800 Unocal Corp. 942,850
-------------
3,150,525
- ----------------------------------------------------------------
Paper--2.3%
35,500 Boise Cascade Corp. 1,493,219
22,300 Champion International Corp. 1,358,906
49,600 Stone Container Corp. 771,900
-------------
3,624,025
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
Portfolio of Investments as PRUDENTIAL DRYDEN FUND
of September 30, 1997 PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Shares Description Value (Note 1)
- ----------------------------------------------------------------
Petroleum (Domestic)--2.3%
18,600 Amerada Hess Corp. $ 1,147,387
17,900 Anadarko Petroleum Corp. 1,285,444
49,023 Union Pacific Resources Group, Inc. 1,283,790
-------------
3,716,621
- ----------------------------------------------------------------
Pharmaceuticals--0.1%
4,300 Vertex Pharmaceuticals, Inc.(a) 162,325
- ----------------------------------------------------------------
Photography/Imaging Technology--1.0%
19,200 Xerox Corp. 1,616,400
- ----------------------------------------------------------------
Publishing--5.7%
43,700 American Greetings Corp. 1,611,438
30,600 McGraw-Hill Companies, Inc. 2,071,237
61,000 New York Times Co. 3,202,500
39,900 Tribune Co. 2,127,169
-------------
9,012,344
- ----------------------------------------------------------------
Railroads--0.9%
21,561 Union Pacific Corp. 1,350,258
- ----------------------------------------------------------------
Realty Investment Trust--0.7%
39,450 Avalon Properties, Inc. 1,173,638
- ----------------------------------------------------------------
Retail--3.0%
24,100 AutoZone, Inc.(a) 723,000
108,979 The Limited, Inc. 2,663,174
24,600 Sears, Roebuck & Co. 1,400,663
-------------
4,786,837
- ----------------------------------------------------------------
Savings & Loan--0.9%
20,200 Washington Mutual, Inc. 1,408,950
- ----------------------------------------------------------------
Semiconductor Devices & Equipment--0.5%
35,600 International Rectifier Corp.(a) $ 832,150
- ----------------------------------------------------------------
Specialty Chemicals--2.5%
24,200 Betz Dearborn Inc. 1,654,675
32,200 Dexter Corp. 1,290,012
31,000 Morton International, Inc. 1,100,500
-------------
4,045,187
- ----------------------------------------------------------------
Steel & Metal--2.0%
24,300 Kennametal, Inc. 1,178,550
30,800 Steel Dynamics, Inc.(a) 723,800
37,800 USX Corp.-U.S. Steel Group 1,313,550
-------------
3,215,900
- ----------------------------------------------------------------
Telecommunications Equipment--1.4%
33,900 General Motors Corp., Series H 2,241,636
- ----------------------------------------------------------------
Trucking & Shipping--0.5%
25,300 Knightsbridge Tankers Ltd. 716,306
- ----------------------------------------------------------------
Waste Management--0.8%
36,800 Waste Management Inc. 1,285,701
-------------
Total common stocks
(cost $58,321,045) 81,192,788
-------------
PREFERRED STOCKS--0.5%
- ----------------------------------------------------------------
15,400 USX Capital Trust Conv. Pfd. 6.75%
(cost $736,572) 736,313
-------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
PRUDENTIAL DRYDEN FUND
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1997
- --------------------------------------------------------------------------------
Principal
Amount
(000) Description Value (Note 1)
- ----------------------------------------------------------------
DEBT OBLIGATIONS--39.4%
- ----------------------------------------------------------------
Corporate Bonds--1.0%
$1,570 General Motors Acceptance Corp.
6.75%, 2/7/02
(cost $1,576,798) $ 1,588,840
-------------
- ----------------------------------------------------------------
U.S. Government Securities--38.4%
9,805 United States Treasury Bond,
7.875%, 2/15/21 11,422,825
United States Treasury Notes,
4,865 8.875%, 11/15/98 5,029,194
7,045 7.50%, 11/15/01 7,424,796
17,435 6.25%, 2/15/03 17,601,155
20,300 5.75%, 8/15/03 19,985,959
-------------
Total U.S. Government securities
(cost $59,559,007) 61,463,929
-------------
Total debt obligations
(cost $61,135,805) 63,052,769
-------------
Total long-term investments
(cost $120,193,422) 144,981,870
-------------
SHORT-TERM INVESTMENT--10.6%
- ----------------------------------------------------------------
Repurchase Agreement--10.6%
16,910 Joint Repurchase Agreement Account,
6.127%, 10/01/97 (Note 5)
(cost $16,910,000) 16,910,000
- ----------------------------------------------------------------
Total Investments--101.3%
(cost $137,103,422; Note 4) 161,891,870
Liabilities in excess of other
assets--(1.3%) (2,011,517)
-------------
Net Assets--100% $ 159,880,353
=============
- ---------------
(a) Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-48
<PAGE>
PRUDENTIAL DRYDEN FUND
Statement of Assets and Liabilities PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1997
------------------
<S> <C>
Investments, at value (cost $137,103,422).............................................................. $161,891,870
Cash................................................................................................... 205,643
Dividends and interest receivable...................................................................... 866,767
Receivable for investments sold........................................................................ 577,190
Receivable for Fund shares sold........................................................................ 127,392
Deferred expenses and other assets..................................................................... 7,060
------------
Total assets....................................................................................... 163,675,922
------------
Liabilities
Payable for investments purchased...................................................................... 2,261,304
Payable for Fund shares reacquired..................................................................... 1,359,140
Accrued expenses....................................................................................... 89,843
Management fee payable................................................................................. 84,977
Distribution fee payable............................................................................... 305
------------
Total liabilities.................................................................................. 3,795,569
------------
Net Assets............................................................................................. $159,880,353
============
Net assets were comprised of:
Shares of beneficial interest, at par............................................................... $ 11,065
Paid-in capital in excess of par.................................................................... 120,808,732
------------
120,819,797
Undistributed net investment income................................................................. 3,191,713
Accumulated net realized gain on investments........................................................ 11,080,395
Net unrealized appreciation on investments.......................................................... 24,788,448
------------
Net assets, September 30, 1997......................................................................... $159,880,353
============
Class A:
Net asset value and redemption price per share
($990,155 / 68,713 shares of beneficial interest issued and outstanding)......................... $14.41
Maximum sales charge (5% of offering price)......................................................... .76
------
Maximum offering price to public.................................................................... $15.17
======
Class B:
Net asset value, offering price and redemption price per share
($212,588 / 14,829 shares of beneficial interest issued and outstanding)......................... $14.34
======
Class C:
Net asset value, offering price and redemption price per share
($5,252 / 366 shares of beneficial interest issued and outstanding).............................. $14.34
======
Class Z:
Net asset value, offering price and redemption price per share
($158,672,358 / 10,980,644 shares of beneficial interest issued and outstanding)................. $14.45
======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-49
<PAGE>
PRUDENTIAL DRYDEN FUND
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended
Net Investment Income September 30, 1997
------------------
Income
Interest.............................. $ 4,870,516
Dividends (net of foreign withholding
taxes of $522)..................... 1,282,755
------------
Total income......................... 6,153,271
------------
Expenses
Management fee........................ 1,009,861
Distribution fee--Class A............. 228
Distribution fee--Class B............. 650
Distribution fee--Class C............. 6
Registration fees..................... 183,000
Transfer agent's fees and expenses.... 167,000
Custodian's fees and expenses......... 92,000
Reports to shareholders............... 88,000
Legal fees............................ 33,000
Administration fee.................... 21,553
Audit fee............................. 15,000
Organization expense.................. 13,213
Trustees' fees........................ 11,250
Miscellaneous......................... 1,676
------------
Total expenses....................... 1,636,437
------------
Net investment income.................... 4,516,834
------------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions.......................... 11,725,117
Net change in unrealized appreciation on
investments........................... 13,786,966
------------
Net gain on investments.................. 25,512,083
------------
Net Increase in Net Assets
Resulting from Operations................ $ 30,028,917
============
PRUDENTIAL DRYDEN FUND
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Increase Year Ended September 30,
------------------------
in Net Assets 1997 1996
-------- --------
Operations
Net investment income.......... $ 4,516,834 $ 4,391,687
Net realized gain on
investment.................. 11,725,117 9,129,045
Net change in unrealized
appreciation/depreciation on
investments................. 13,786,966 (1,120,181)
------------ -------------
Net increase in net assets
resulting from operations... 30,028,917 12,400,551
------------ -------------
Dividends and distributions
Dividends to shareholders from
net investment income
Class A..................... (64) --
Class B..................... (6) --
Class C..................... (6) --
Class Z..................... (4,627,738) (3,972,955)
------------ -------------
(4,627,814) (3,972,955)
------------ -------------
Distributions to shareholders
from net realized gains
Class A..................... (128) --
Class B..................... (12) --
Class C..................... (12) --
Class Z..................... (9,255,475) (1,932,789)
------------ -------------
(9,255,627) (1,932,789)
------------ -------------
Fund share transactions (Note 6)
Net proceeds from shares
sold........................ 55,048,728 36,454,403
Net asset value of shares
issued in reinvestment of
distributions............... 13,883,406 5,905,744
Cost of shares reacquired...... (78,785,554) (28,618,544)
------------ -------------
Net increase (decrease) in net
assets from Fund share
transactions................ (9,853,420) 13,741,603
------------ -------------
Total increase.................... 6,292,056 20,236,410
Net Assets
Beginning of year................. 153,588,297 133,351,887
------------ -------------
End of year....................... $159,880,353 $ 153,588,297
============ =============
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-50
<PAGE>
PRUDENTIAL DRYDEN FUND
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Prudential Dryden Fund (the "Company") is registered under the Investment
Company Act of 1940 as an open-end, diversified management investment company.
The Company was established as a Delaware business trust on May 11, 1992 and
currently consists of six separate funds, one of which is Active Balanced Fund
(the "Fund"). Prior to October 30, 1996 the Company was named the Prudential
Institutional Fund and prior to September 20, 1996, it consisted of seven
separate funds (the "Funds"), five of which were reorganized on September 20,
1996 and combined with existing funds in the Prudential Mutual Funds family of
funds (see Note 7).
The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. Investment operations of the Fund commenced
on January 4, 1993. The Fund's investment objective is to achieve total returns
approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuation: Securities, including options, warrants, futures contracts
and options thereon, for which the primary market is a national securities
exchange, commodities exchange, board of trade or NASDAQ are valued at the last
sale price on such exchange or board of trade on the date of valuation or, if
there was no sale on such day, at the mean between the closing bid and asked
prices quoted on such day or at the bid price in the absence of an asked price.
Securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued by a principal market maker or independent pricing
agent.
U.S. government securities for which market quotations are readily available are
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for which
the pricing agent or principal market maker does not provide a valuation or
methodology or provides a valuation or methodology that, in the judgment of the
subadviser, does not represent fair value, are valued at fair value as
determined under procedures established by the Trustees.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and net capital
gains, if any, at least annually. Dividends and distributions are recorded on
the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net investment income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
- --------------------------------------------------------------------------------
B-51
<PAGE>
PRUDENTIAL DRYDEN FUND
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over a period of sixty months
from the date each of the Funds commenced investment operations.
Reclassification of Capital Accounts: The Fund accounts and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. For the fiscal year
ended September 30, 1997, the application of this statement increased unrealized
appreciation on investments and decreased paid-in capital by $7,210. Net
investment income, net realized gains, and net assets were not affected by these
reclassifications.
- ------------------------------------------------------------
Note 2. Agreements
The Fund had a management agreement with Prudential Institutional Fund
Management, Inc. through October 30, 1996. Pursuant to this agreement,
Prudential Institutional Fund Management, Inc. had responsibility for all
investment advisory services and supervised the subadviser's performance of such
services.
Prudential Institutional Fund Management, Inc. had a subadvisory agreement with
Jennison Associates Capital Corp. ("Jennison") through October 30, 1996.
Jennison furnished investment advisory services in connection with the
management of the Fund. Prudential Institutional Fund Management, Inc. paid for
the costs and expenses attributable to the subadvisory agreements and the
salaries and expenses of all personnel of the Fund except for fees and expenses
of unaffiliated Trustees. The Fund paid for all other costs and expenses.
Through October 30, 1996 the management fee paid Prudential Institutional Fund
Management, Inc. was computed daily and payable monthly at an annual rate of .70
of 1% of the average daily net assets of the Fund. Effective October 31, 1996
the Fund entered into a management agreement with Prudential Investments Fund
Management LLC ("PIFM") under which the management fee is computed daily and
payable monthly at an annual rate of .65 of 1% of the average daily net assets
of the Fund. Pursuant to this agreement PIFM has responsibility for all
investment advisory services. PIFM has entered into a subadvisory agreement with
Jennison under which Jennison is compensated by PIFM for its services at an
annual rate of .30 of 1% of the Fund's average daily net assets up to and
including $300 million and .25 of 1% of the Fund's average daily net assets in
excess of $300 million. This is the same rate paid to Jennison under the prior
subadvisory agreement.
Jennison, subject to the supervision of PIFM, manages the assets of the Fund in
accordance with its investment objectives and policies and in a manner
consistent with the previous arrangement. PIFM pays for the compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund will bear all other costs and expenses.
The Fund had an administration agreement with PIFM through October 30, 1996. The
administration fee paid PIFM was computed daily and payable monthly, at an
annual rate of .17% of the Company's average daily net assets up to $250 million
and .15% of the Company's average daily net assets in excess of $250 million.
PIFM furnished to the Fund such services as the Fund required in connection with
the administration of the Fund's business affairs. PIFM provided certain
transfer agent services through its wholly-owned subsidiary, Prudential Mutual
Fund Services LLC ("PMFS"). For such services, PMFS was paid .03% of the
Company's average daily net assets up to $250 million and .02% of the Company's
average daily net assets in excess of $250 million from the administration fee
paid to PIFM (see note 3 below).
Effective October 31, 1996 Prudential Securities Incorporated ("PSI") became the
distributor of the Fund's Class A, Class B and Class C shares. PSI also incurs
the expenses of distributing the Fund's Class Z shares under the distribution
agreement, none of which is reimbursed by or paid for by the Fund. The Fund
compensates PSI for distributing and servicing the Fund's Class A, Class B and
Class C shares pursuant to plans of distribution (the "Class A, B and C Plans"),
regardless of expenses actually incurred. The distribution fees are accrued
daily and payable monthly. No distribution or service fees are paid to PSI as
distributor of Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were charged at a rate of .25 of 1%, 1% and 1% of
the average daily net assets of the Class A, B and C shares, respectively, for
the period November 7, 1996 through September 30, 1997.
PSI has advised the Fund that it received approximately $12,900 in front-end
sales charges resulting from sales of Class A shares during the period ended
September 30, 1997. From these fees, PSI paid such sales charges to affiliated
broker-dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
- --------------------------------------------------------------------------------
B-52
<PAGE>
PRUDENTIAL DRYDEN FUND
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Jennison, PIFM and PSI are wholly-owned subsidiaries of The Prudential Insurance
Company of America.
The Fund, along with other affiliated registered investment companies (the
"funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of September 30,
1997. The funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the funds.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
PMFS, a wholly-owned subsidiary of PIFM, serves as the Fund's transfer agent.
During the year ended September 30, 1997, the Fund incurred fees of
approximately $165,100 for the services of PMFS. As of September 30, 1997,
approximately $16,200 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations also include certain out-of-pocket
expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1997 aggregated $64,694,120 and $66,972,643,
respectively.
The cost basis of investments for federal income tax purposes is $137,231,525.
As of September 30, 1997, net unrealized appreciation for federal income tax
purposes was $24,660,345 (gross unrealized appreciation--$24,737,869, gross
unrealized depreciation--$77,524).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more joint repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. At September 30,
1997, the Fund had a 1.3% undivided interest in the repurchase agreements in the
joint account. The undivided interest represented $16,910,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Credit Suisse First Boston Corp., 6.15%, in the principal amount of
$341,000,000, repurchase price $341,058,254, due 10/1/97. The value of the
collateral including accrued interest was $352,935,110.
Goldman, Sachs & Co., 6.15%, in the principal amount of $341,000,000, repurchase
price $341,058,254, due 10/1/97. The value of the collateral including accrued
interest was $347,820,010.
Morgan Stanley, Dean Witter, Discover & Co., 6.15%, in the principal amount of
$325,256,000, repurchase price $325,311,564, due 10/1/97. The value of the
collateral including accrued interest was $331,761,960.
UBS Securities LLC, 6.06%, in the principal amount of $341,000,000, repurchase
price $341,057,402, due 10/1/97. The value of the collateral including accrued
interest was $347,821,030.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. Special exchange privileges are also available for
shareholders who qualify to purchase Class A shares at net asset value or Class
Z shares. Class Z shares are not subject to any sales or redemption charge and
are offered exclusively for sale to a limited group of investors. The Fund has
authorized an unlimited number of shares of beneficial interest at $.001 par
value per share. Transactions in shares of beneficial interest during the year
ended September 30, 1997 and September 30, 1996 were as follows:
Class A Shares Amount
- ----------------------------------- ---------- ------------
November 7, 1996(a)
through September 30, 1997:
Shares sold........................ 68,711 $ 971,421
Shares issued in reinvestment of
dividends and distributions...... 15 183
Shares reacquired.................. (13) (178)
---------- ------------
Net increase in shares
outstanding...................... 68,713 $ 971,426
========== ============
- --------------------------------------------------------------------------------
B-53
<PAGE>
PRUDENTIAL DRYDEN FUND
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Class B Shares Amount
- ------- ---------- ------------
November 7, 1996(a)
through September 30, 1997:
Shares sold........................ 14,903 $ 197,257
Shares issued in reinvestment of
dividends and distributions...... 1 9
Shares reacquired.................. (75) (964)
---------- ------------
Net increase in shares
outstanding...................... 14,829 $ 196,302
========== ============
Class C
- -------
November 7, 1996(a)
through September 30, 1997:
Shares sold........................ 365 $ 5,122
Shares issued in reinvestment of
dividends and distributions...... 1 9
Shares reacquired.................. -- --
---------- ------------
Net increase in shares
outstanding...................... 366 $ 5,131
========== ============
Class Z
- -------
Year ended September 30, 1997:
Shares sold........................ 4,174,112 $ 53,874,928
Shares issued in reinvestment of
dividends and distributions...... 1,097,487 13,883,205
Shares reacquired.................. (6,097,293) (78,784,412)
---------- ------------
Net decrease in shares
outstanding...................... (825,694) $(11,026,279)
========== ============
Year ended September 30, 1996:
Shares sold........................ 2,893,381 $ 36,454,403
Shares issued in reinvestment of
dividends and distributions...... 483,285 5,905,744
Shares reacquired.................. (2,273,501) (28,618,544)
---------- ------------
Net increase in shares
outstanding...................... 1,103,165 $ 13,741,603
========== ============
- ---------------
(a) Commencement of offering of Class A, B, and C shares.
Of the shares outstanding at September 30, 1997, PIFM and affiliates owned
388,158 shares of the Fund.
- ------------------------------------------------------------
Note 7. Reorganization
On May 17, 1996, the Trustees of the Company approved an Agreement and Plan of
Reorganization (the "Plan of Reorganization") for five other series of the
Company. Each Plan of Reorganization was approved by applicable shareholders on
September 7, 1996. This Fund approved new manager, distributor and transfer
agency agreements on October 30, 1996.
Under each Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund ("Series")
were transferred at net asset value for equivalent value of Class Z shares of
Prudential Jennison Series Fund, Inc., Prudential Allocation Fund--Balanced
Portfolio, Prudential Government Income Fund, Inc. and Prudential MoneyMart
Assets, Inc., respectively. These Series then ceased operations.
The Company's International Stock Fund joined the Prudential Global Fund as
separate series of a newly named Prudential World Fund. Existing shareholders
became Class Z shareholders and the International Stock Fund also began offering
Classes A, B and C shares.
Prudential Stock Index Fund and the Fund remained a series of The Prudential
Institutional Fund (renamed the Prudential Dryden Fund). Existing shareholders
of the Fund became Class Z shareholders and the Fund began offering Classes A, B
and C shares. Prudential Stock Index Fund offers Class I and Class Z shares.
Effective October 30, 1996 these funds were managed by PIFM. PMFS provides
transfer agency services and PSI acts as distributor.
- ------------------------------------------------------------
Note 8. Proposed Reorganization
On August 26, 1997, the Board of Trustees of the Fund Company approved an
Agreement and Plan of Conversion and Liquidation (the "Plan") which provides for
the transfer of all of the assets of the Fund to the Prudential Jennison Series
Fund, Inc.--Prudential Jennison Active Balanced Fund (the "Portfolio") in
exchange for the respective Class A, Class B, Class C and Class Z shares of the
Portfolio and the Portfolio's assumption of the liabilities of the Fund.
The Plan is subject to approval by the shareholders of the Fund at a shareholder
meeting scheduled on January 15, 1998. If the Plan is approved, it is expected
that the reorganization will take place on or about January 23, 1998. The Fund
will bear the costs of the reorganization, including the cost of proxy
solicitation.
- --------------------------------------------------------------------------------
B-54
<PAGE>
PRUDENTIAL DRYDEN FUND
Financial Highlights PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
------------- ------------- ------------- ------------------------------------
November 7, November 7, November 7,
1996(e) 1996(e) 1996(e)
Through Through Through Year Ended September 30,
September 30, September 30, September 30, ------------------------------------
1997 1997 1997 1997 1996 1995
------------- ------------- ------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $ 13.40 $ 13.40 $ 13.40 $ 13.01 $ 12.46 $ 10.92
----- ----- ----- ---------- -------- --------
Income from investment
operations:
Net investment income............. .21(f) .19(f) .13(f) .39(f) .29(b) .33(b)
Net realized and unrealized gain
(loss) on investment
transactions................... 1.97 1.92 1.98 2.22 .81 1.54
----- ----- ----- ---------- -------- --------
Total from investment
operations.................. 2.18 2.11 2.11 2.61 1.10 1.87
----- ----- ----- ---------- -------- --------
Less distributions:
Dividends from net investment
income......................... (.39) (.39) (.39) (.39) (.37) (.29)
Distributions from net realized
gains.......................... (.78) (.78) (.78) (.78) (.18) (.04)
----- ----- ----- ---------- -------- --------
Total distributions............ (1.17) (1.17) (1.17) (1.17) (.55) (.33)
----- ----- ----- ---------- -------- --------
Net asset value, end of period.... $ 14.41 $ 14.34 $ 14.34 $ 14.45 $ 13.01 $ 12.46
===== ===== ===== ========== ======== ========
TOTAL RETURN(d)................... 17.48% 16.91% 16.91% 21.34% 9.11% 17.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $ 990 $ 213 $ 5 $158,672 $153,588 $133,352
Average net assets (000).......... $ 100 $ 71 $ 1 $154,199 $142,026 $104,821
Ratios to average net assets:
Expenses, including
distribution fees........... 1.31%(c) 2.06%(c) 2.06%(c) 1.06% 1.00%(b) 1.00%(b)
Expenses, excluding
distribution fees........... 1.06%(c) 1.06%(c) 1.06%(c) N/A N/A N/A
Net investment income.......... 2.69%(c) 1.94%(c) 1.94%(c) 2.94% 3.09%(b) 3.53%(b)
Portfolio turnover rate........... 50% 50% 50% 50% 51% 30%
Average commission rate paid per
share.......................... $ .0625 $ .0625 $ .0625 $ .0625 $ .0654 N/A
<CAPTION>
January 4,
1993(a)
Through
September 30,
1994 1993
------- -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $ 11.05 $ 10.00
------- ------
Income from investment
operations:
Net investment income............. .24(b) .21(b)
Net realized and unrealized gain
(loss) on investment
transactions................... (.12) .84
------- ------
Total from investment
operations.................. .12 1.05
------- ------
Less distributions:
Dividends from net investment
income......................... (.14) --
Distributions from net realized
gains.......................... (.11) --
------- ------
Total distributions............ (.25) --
------- ------
Net asset value, end of period.... $ 10.92 $ 11.05
======= ======
TOTAL RETURN(d)................... 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $81,176 $38,786
Average net assets (000).......... $58,992 $12,815
Ratios to average net assets:
Expenses, including
distribution fees........... 1.00%(b) 1.00%(b)(c)
Expenses, excluding
distribution fees........... N/A N/A
Net investment income.......... 3.06%(b) 2.68%(b)(c)
Portfolio turnover rate........... 40% 47%
Average commission rate paid per
share.......................... N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized. Total return includes the effect of expense subsidies where
applicable.
(e) Commencement of offering of Class A, B and C shares.
(f) Calculated based upon weighted average shares outstanding during the year.
N/A--Data not required for these periods.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE>
PRUDENTIAL DRYDEN FUND
Report of Independent Accountants PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Dryden Fund--Prudential Active Balanced Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Dryden Fund--Prudential
Active Balanced Fund (the "Fund", one of the portfolios constituting Prudential
Dryden Fund) (formerly The Prudential Institutional Fund--Prudential Active
Balanced Fund) at September 30, 1997, and the results of its operations, the
changes in its net assets and the financial highlights for the year then ended,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at September 30, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where securities purchased had not been received, provides a
reasonable basis for the opinion expressed above. The accompanying statement of
changes in net assets for the year ended September 30, 1996 and the financial
highlights for each of the four periods in the period ended September 30, 1996
were audited by other independent accountants, whose opinion dated November 13,
1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
November 14, 1997
- --------------------------------------------------------------------------------
B-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF THE PRUDENTIAL INSTITUTIONAL
FUND-ACTIVE BALANCED FUND
We have audited the accompanying statement of changes in net assets of The
Prudential Institutional Fund-Active Balanced Fund for the year ended September
30, 1996, and the financial highlights contained in the prospectus for each of
the years in the three year period ended September 30, 1996 and for the period
January 4, 1993 (commencement of investment operations) to September 30, 1993.
This financial statement and these financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on this
financial statement and these financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statement and financial highlights present
fairly, in all material respects, the changes in net assets and the financial
highlights of The Prudential Institutional Fund-Active Balanced Fund for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
November 13, 1996
B-57
<PAGE>
Portfolio of Investments as PRUDENTIAL JENNISON SERIES FUND, INC.
of September 30, 1997 PRUDENTIAL JENNISON GROWTH FUND
- -----------------------------------------------------------------------
Shares Description Value (Note 1)
- -----------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.9%
COMMON STOCKS--98.9%
- -----------------------------------------------------------------------
Aerospace/Defense--2.5%
325,000 Boeing Co. $ 17,692,188
396,000 Gartner Group, Inc. 11,880,000
--------------
29,572,188
- -----------------------------------------------------------------------
Banks & Financial Services--8.0%
218,900 Chase Manhattan Corp. 25,830,200
260,900 MBNA Corp. 10,566,450
421,390 Morgan Stanley, Dean Witter,
Discover & Co. 22,781,397
399,600 Schwab (Charles) Corp. 14,285,700
329,400 Washington Mutual, Inc. 22,975,650
--------------
96,439,397
- -----------------------------------------------------------------------
Business Services--6.3%
627,425 CUC International, Inc.(a) 19,450,175
377,600 Eagle River Interactive, Inc.(a) 4,059,200
318,800 Manpower, Inc. 12,592,600
276,500 Omnicom Group, Inc. 20,115,375
269,800 Reuters Holdings PLC (ADR)
(United Kingdom) 19,223,250
--------------
75,440,600
- -----------------------------------------------------------------------
Cellular Communications--0.9%
214,600 Vodafone Group PLC (ADR) (United
Kingdom) 11,534,750
- -----------------------------------------------------------------------
Chemicals--1.5%
460,000 Monsanto Co. 17,940,000
- -----------------------------------------------------------------------
Computer Systems/Peripherals--10.0%
404,800 Compaq Computer Corp.(a) 30,258,800
218,400 Dell Computer Corp.(a) 21,157,500
362,700 Diebold, Inc. 17,182,913
558,900 Hewlett-Packard Co. 38,878,481
116,400 International Business Machines
Corp. 12,331,125
--------------
119,808,819
Diversified Operations--1.2%
206,700 General Electric Co. $ 14,068,519
- -----------------------------------------------------------------------
EDP Software & Services--3.6%
339,400 Intuit, Inc.(a) 10,860,800
130,400 Microsoft Corp. (a) 17,253,550
165,500 SAP AG (ADR)(Germany) 14,728,110
--------------
42,842,460
- -----------------------------------------------------------------------
Electronic Components--6.7%
348,800 Intel Corp. 32,198,600
610,400 International Rectifier Corp.(a) 14,268,100
372,200 LSI Logic Corp. (a) 11,956,925
161,800 Texas Instruments, Inc. 21,863,225
--------------
80,286,850
- -----------------------------------------------------------------------
Health Care Services--2.7%
628,700 Healthsouth Corp.(a) 16,778,431
536,000 PhyCor, Inc.(a) 15,577,500
--------------
32,355,931
- -----------------------------------------------------------------------
Hotels--2.5%
237,800 Doubletree Corp.(a) 11,473,850
541,200 Hilton Hotels Corp. 18,231,675
--------------
29,705,525
- -----------------------------------------------------------------------
Household & Personal Care Products--1.3%
176,700 Gillette Co. 15,251,419
- -----------------------------------------------------------------------
Industrial Technology/Instruments--4.3%
173,500 Applied Materials, Inc.(a) 16,525,875
248,500 KLA Tencor Corp.(a) 16,789,281
426,700 Symbol Technologies, Inc. 18,748,131
--------------
52,063,287
- -----------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
Portfolio of Investments as PRUDENTIAL JENNISON SERIES FUND, INC.
of September 30, 1997 PRUDENTIAL JENNISON GROWTH FUND
- -----------------------------------------------------------------------
Shares Description Value (Note 1)
- -----------------------------------------------------------------------
Insurance--7.2%
82,900 CIGNA Corp. $ 15,440,125
316,800 MGIC Investment Corp. 18,156,600
327,533 Mutual Risk Management, Ltd. 16,642,771
218,300 Provident Companies, Inc. 15,267,356
448,700 UNUM Corp. 20,471,937
--------------
85,978,789
- -----------------------------------------------------------------------
Machinery--1.1%
193,800 Case Corp. 12,911,925
- -----------------------------------------------------------------------
Media--2.7%
278,300 Clear Channel Communications,
Inc.(a) 18,054,712
181,100 The Walt Disney Co. 14,601,188
--------------
32,655,900
- -----------------------------------------------------------------------
Networking--5.4%
533,200 3Com Corp.(a) 27,326,500
512,000 Cisco Systems, Inc. (a) 37,408,000
--------------
64,734,500
- -----------------------------------------------------------------------
Oil Services--2.6%
368,600 Schlumberger, Ltd. 31,031,512
- -----------------------------------------------------------------------
Pharmaceuticals--11.2%
150,200 Boston Scientific Corp. (a) 8,289,163
246,100 Bristol-Myers Squibb Co. 20,364,775
224,400 Eli Lilly & Co. 27,026,175
689,200 Pfizer, Inc. 41,395,075
523,700 Smithkline Beecham PLC (ADR)
(United Kingdom) 25,595,837
91,100 Warner-Lambert Co. 12,292,806
--------------
134,963,831
- -----------------------------------------------------------------------
Retail--8.5%
216,100 AutoZone, Inc.(a) 6,483,000
662,500 Corporate Express, Inc.(a) 13,995,313
455,925 Dollar General Corp. 15,529,945
355,600 Gap, Inc. 17,802,225
207,600 Home Depot, Inc. $ 10,821,150
249,700 Kohl's Corp.(a) 17,728,700
336,800 Sears, Roebuck & Co. 19,176,550
--------------
101,536,883
- -----------------------------------------------------------------------
Telecommunication Services--1.3%
437,800 AirTouch Communications, Inc.(a) 15,514,538
15,000 RSL Communications, Ltd.(a) 330,000
--------------
15,844,538
- -----------------------------------------------------------------------
Telecommunications Equipment--5.6%
190,400 Ciena Corp.(a) 9,430,750
286,600 Motorola, Inc. 20,599,375
242,500 Nokia Corp. (ADR)(Finland) 22,749,531
287,100 Tellabs, Inc.(a) 14,785,650
--------------
67,565,306
- -----------------------------------------------------------------------
Trucking & Shipping--1.8%
278,100 Federal Express Corp.(a) 22,248,000
--------------
Total long-term investments
(cost $853,003,444) 1,186,780,929
--------------
Moody's Principal
Rating Amount
(Unaudited) (000)
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENT--0.9%
Commercial Paper--0.9%
P1 $10,159 Ford Motor Credit Co.
6.15%, 10/1/97
(cost $10,159,000) 10,159,000
- -----------------------------------------------------------------------
Total Investments--99.8%
(cost $863,162,444;
Note 4) 1,196,939,929
Other assets in excess
of liabilities--0.2% 2,489,931
---------------
Net Assets--100% $ 1,199,429,860
===============
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- -----------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Statement of Assets and Liabilities PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1997
------------------
<S> <C>
Investments, at value (cost $863,162,444).............................................. $1,196,939,929
Cash................................................................................... 1,132,392
Receivable for investments sold........................................................ 5,014,392
Receivable for Series shares sold...................................................... 4,739,703
Dividends and interest receivable...................................................... 652,640
Deferred expenses and other assets..................................................... 135,543
--------------
Total assets........................................................................ 1,208,614,599
--------------
Liabilities
Payable for investments purchased...................................................... 6,036,257
Payable for Series shares reacquired................................................... 1,919,751
Management fee payable................................................................. 570,278
Distribution fees payable.............................................................. 378,572
Accrued expenses and other liabilities................................................. 262,783
Withholding taxes payable.............................................................. 17,098
--------------
Total liabilities................................................................... 9,184,739
--------------
Net Assets............................................................................. $1,199,429,860
==============
Net assets were comprised of:
Common stock, at par................................................................ $ 78,191
Paid-in capital in excess of par.................................................... 784,299,181
--------------
784,377,372
Accumulated net realized gain on investments........................................ 81,276,520
Net unrealized appreciation on investments.......................................... 333,775,968
--------------
Net assets, September 30, 1997......................................................... $1,199,429,860
==============
Class A:
Net asset value and redemption price per share
($145,022,025 / 9,421,277 shares of common stock issued and outstanding)......... $15.39
Maximum sales charge (5% of offering price)......................................... .81
------
Maximum offering price to public.................................................... $16.20
======
Class B:
Net asset value, offering price and redemption price per share
($419,405,140 / 27,634,577 shares of common stock issued and outstanding)........ $15.18
======
Class C:
Net asset value, offering price and redemption price per share
($25,133,800 / 1,656,067 shares of common stock issued and outstanding).......... $15.18
======
Class Z:
Net asset value, offering price and redemption price per share
($609,868,895 / 39,477,787 shares of common stock issued and outstanding)........ $15.45
======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-60
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Operations
- --------------------------------------------------------------
Year Ended
September 30,
Net Investment Income (Loss) 1997
-------------
Income
Dividends (net of foreign withholding taxes
of $185,509)............................ $ 6,429,231
Interest................................... 967,368
-------------
Total income............................ 7,396,599
-------------
Expenses
Management fee............................. 5,276,337
Distribution fee--Class A.................. 264,954
Distribution fee--Class B.................. 2,994,762
Distribution fee--Class C.................. 182,481
Transfer agent's fees and expenses......... 1,376,000
Reports to shareholders.................... 235,000
Registration fees.......................... 233,000
Custodian's fees and expenses.............. 128,000
Legal fees and expenses.................... 65,000
Amortization of deferred organization
expense................................. 37,967
Audit fee.................................. 20,000
Insurance expense.......................... 12,000
Directors' fees and expenses............... 10,500
Miscellaneous.............................. 11,912
-------------
Total expenses.......................... 10,847,913
-------------
Net investment income (loss).................. (3,451,314)
-------------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions............................... 90,453,012
Net change in unrealized appreciation on
investments................................ 224,732,097
-------------
Net gain on investments....................... 315,185,109
-------------
Net Increase in Net Assets
Resulting from Operations..................... $311,733,795
=============
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
November 2, 1995(a)
Year Ended Through
Increase (Decrease) September 30, September 30,
in Net Assets 1997 1996
------------- -------------------
Operations
Net investment income
(loss)............... $ (3,451,314) $ (2,046,837)
Net realized gain (loss)
on investments....... 90,453,012 (9,176,492)
Net change in unrealized
appreciation on
investments.......... 224,732,097 36,196,257
-------------- --------------------
Net increase in net
assets resulting from
operations........... 311,733,795 24,972,928
-------------- --------------------
Series share transactions
(net of share
conversions) (Note 5)
Net proceeds from shares
sold................. 859,180,110 819,026,956
Cost of shares
reacquired........... (666,161,401) (149,422,528)
-------------- --------------------
Net increase in net
assets from Series
share transactions... 193,018,709 669,604,428
-------------- --------------------
Total increase............. 504,752,504 694,577,356
Net Assets
Beginning of period........ 694,677,356 100,000
-------------- --------------------
End of period.............. $1,199,429,860 $ 694,677,356
============== ====================
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-61
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
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 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.
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 mean between the
closing bid and asked prices on such day or at the bid price in the absence of
an asked price, 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 mean between the
most recently quoted bid and asked prices provided by a principal market maker
or independent pricing agent. Options on securities and indices traded on an
exchange are valued at the mean between the most recently quoted bid and asked
prices provided by the respective exchange. Futures contracts and options
thereon are valued at the last sales price as of the close of business of the
exchange. Securities for which 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 and is net of
discount accretion and premium amortization. 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 continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Series' understanding of the applicable country's tax rules and rates.
Deferred Organization Expenses: Approximately $200,000 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.
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. For the year ended
September 30, 1997, the Series reclassified current net operating losses by
decreasing accumulated net investment loss and decreasing paid-in capital by
$3,451,314. Net investment income, net realized gains, and net assets were not
affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to a subadvisory
agreement between PIFM and Jennison Associates Capital
- --------------------------------------------------------------------------------
B-62
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
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 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.
Such expenses under the plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the fiscal year ended
September 30, 1997.
PSI has advised the Series that it has received approximately $608,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended September 30, 1997. From these fees, PSI paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Series that for the year ended September 30, 1997, it
received approximately $727,100 and $5,600 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
$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
Series has not borrowed any amounts pursuant to the Agreement as of September
30, 1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended September 30, 1997,
the Series incurred fees of approximately $1,236,000 for the services of PMFS.
As of September 30, 1997, approximately $122,000 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 year ended September 30, 1997, PSI earned approximately $50,600 in
brokerage commissions from portfolio transactions executed on behalf of the
Series.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1997 were $724,562,581 and $541,374,570,
respectively.
The cost of investments for federal income tax purposes at September 30, 1997,
was $864,345,826 and, accordingly, net unrealized appreciation of investments
for federal income tax purposes was $332,594,103 (gross unrealized
appreciation--$343,656,967; gross unrealized depreciation--$11,062,864).
- ------------------------------------------------------------
Note 5. Capital
The Series 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
- --------------------------------------------------------------------------------
B-63
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
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.
There are 3 billion shares of $.001 par value common stock authorized which are
divided into three series, each of which offers four classes, designated Class
A, Class B, Class C and Class Z, each of which consists of 250 million
authorized shares. Of the shares outstanding at September 30, 1997, PIFM owned
10,000 shares of the Series.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ------- ----------- -------------
Year ended September 30, 1997
Shares sold........................ 25,998,077 $ 330,048,473
Shares reacquired.................. (24,630,004) (310,892,744)
----------- -------------
Net increase in shares outstanding
before conversion................ 1,368,073 19,155,729
Shares issued upon conversion from
Class B.......................... 263,019 3,525,367
----------- -------------
Net increase in shares
outstanding...................... 1,631,092 $ 22,681,096
=========== =============
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
- -------
Year ended September 30, 1997
Shares sold........................ 11,358,438 $ 145,846,890
Shares reacquired.................. (4,716,088) (59,467,575)
----------- -------------
Net increase in shares outstanding
before conversion................ 6,642,350 86,379,315
Shares reacquired upon conversion
into Class A..................... (266,196) (3,525,367)
----------- -------------
Net increase in shares
outstanding...................... 6,376,154 $ 82,853,948
=========== =============
Class B Shares Amount
- ------- ----------- -------------
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
=========== =============
Class C
- -------
Year ended September 30, 1997
Shares sold........................ 560,427 $ 7,367,068
Shares reacquired.................. (307,304) (3,823,506)
----------- -------------
Net increase in shares
outstanding...................... 253,123 $ 3,543,562
=========== =============
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
- -------
Year ended September 30, 1997
Shares sold........................ 30,018,513 $ 375,917,679
Shares reacquired.................. (23,558,475) (291,977,576)
----------- -------------
Net increase in shares
outstanding...................... 6,460,038 $ 83,940,103
=========== ===========
April 15, 1996(b) through
September 30, 1996
Shares sold........................ 2,971,624 $ 32,570,435
Shares issued due to acquisition of
The Prudential Institutional
Fund--Growth Stock 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
=========== =============
- ---------------
(a) Commencement of investment operations.
(b) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-64
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Financial Highlights PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------- ------------------------------- -------------
November 2, November 2,
Year 1995(a) Year 1995(a) Year
Ended Through Ended Through Ended
September 30, September 30, September 30, September 30, September 30,
1997 1996 1997 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <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
------------- ------ ------------- ------------- ------
Income from investment operations
Net investment income (loss)(d)..... (.03) (.03) (.12) (.10) (.12)
Net realized and unrealized gain on
investment transactions.......... 4.45 1.00 4.41 .99 4.41
------------- ------ ------------- ------------- ------
Total from investment
operations.................... 4.42 .97 4.29 .89 4.29
------------- ------ ------------- ------------- ------
Net asset value, end of period...... $ 15.39 $ 10.97 $ 15.18 $ 10.89 $ 15.18
============= ====== ============= ============= ======
TOTAL RETURN(c)..................... 40.29% 9.70% 39.39% 8.90% 39.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)..... $ 145,022 $85,440 $ 419,405 $ 231,541 $25,134
Average net assets (000)............ $ 105,982 $70,667 $ 299,476 $ 162,412 $18,248
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.09% 1.23%(e) 1.84% 1.98%(e) 1.84%
Expenses, excluding distribution
fees.......................... .84% .98%(e) .84% .98%(e) .84%
Net investment income (loss)..... (.25)% (.37)%(e) (1.00)% (1.12)%(e) (1.00)%
Portfolio turnover rate............. 63% 42% 63% 42% 63%
Average commission rate paid per
share............................ $ .0596 $ .0611 $ .0596 $ .0611 $ .0596
<CAPTION>
Class Z
-------------------------------
November 2, April 15,
1995(a) Year 1996(b)
Through Ended Through
September 30, September 30, September 30,
1996 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................... $ 10.00 $ 10.98 $ 10.32
------ ------------- -------------
Income from investment operations
Net investment income (loss)(d)..... (.10) -- (.02)
Net realized and unrealized gain on
investment transactions.......... .99 4.47 .68
------ ------------- -------------
Total from investment
operations.................... .89 4.47 .66
------ ------------- -------------
Net asset value, end of period...... $ 10.89 $ 15.45 $ 10.98
====== ============= =============
TOTAL RETURN(c)..................... 8.90% 40.71% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)..... $15,281 $ 609,869 $ 362,416
Average net assets (000)............ $12,550 $ 455,684 $ 26,829
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.98%(e) .84% .98%(e)
Expenses, excluding distribution
fees.......................... .98%(e) .84% .98%(e)
Net investment income (loss)..... (1.12)%(e) -- (.12)%(e)
Portfolio turnover rate............. 42% 63% 42%
Average commission rate paid per
share............................ $ .0611 $ .0596 $ .0611
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Commencement of offering of Class Z shares.
(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.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-65
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Report of Independent Accountants PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Jennison Series Fund, Inc., Prudential Jennison Growth Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Jennison Series Fund,
Inc., Prudential Jennison Growth Fund (the 'Fund', one of the portfolios
constituting Prudential Jennison Series Fund, Inc.) at September 30, 1997, and
the results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at September 30, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased had not been received, provides a reasonable basis for the
opinion expressed above. The accompanying statement of changes in net assets and
the financial highlights for the period ended September 30, 1996 were audited by
other independent accountants, whose opinion dated November 4, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
November 14, 1997
B-66
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PRUDENTIAL JENNISON GROWTH FUND:
We have audited the accompanying statement of changes in net assets and
Financial Highlights of Prudential Jennison Growth Fund for the period November
2, 1995 (commencement of investment operations) to September 30, 1996. This
financial statement and these financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on this financial
statement and these 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 statement 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 statement. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statement and financial highlights present
fairly, in all material respects, the changes in net assets and the financial
highlights of Prudential Jennison Growth Fund for the respective stated period
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
November 4, 1996
B-67
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Portfolio of Investments as PRUDENTIAL JENNISON GROWTH &
of September 30, 1997 INCOME FUND
- --------------------------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--88.2%
COMMON STOCKS--87.3%
- ---------------------------------------------------------------
Aerospace/Defense--2.8%
54,700 General Motors Corp., Class H $ 3,617,038
- ---------------------------------------------------------------
Airlines--1.0%
14,000 Delta Airlines, Inc. 1,318,625
- ---------------------------------------------------------------
Aluminum--4.1%
73,200 Alumax, Inc. (a) 2,992,050
33,000 Reynolds Metals Co. 2,336,812
------------
5,328,862
- ---------------------------------------------------------------
Automobiles & Trucks--3.9%
74,900 General Motors Corp. 5,013,619
- ---------------------------------------------------------------
Banking--5.6%
21,500 Chase Manhattan Corp. 2,537,000
23,600 Fleet Financial Group, Inc. 1,547,275
184,700 Hibernia Corp., Class A 3,139,900
------------
7,224,175
- ---------------------------------------------------------------
Business Services--4.3%
63,700 CUC International, Inc. (a) 1,974,700
29,100 Manpower, Inc. 1,149,450
69,800 Ryder System, Inc. 2,508,437
------------
5,632,587
- ---------------------------------------------------------------
Cellular Communications--0.5%
12,500 Vodafone Group PLC (ADR)
(United Kingdom) 671,875
- ---------------------------------------------------------------
Commercial Services--1.4%
74,600 Ogden Corp. 1,762,425
- ---------------------------------------------------------------
Computer Systems/Peripherals--6.8%
29,700 Digital Equipment Corp. (a) 1,286,381
30,100 Hewlett-Packard Co. 2,093,831
126,900 Intergraph Corp. (a) $ 1,380,038
28,800 International Business Machines
Corp. 3,051,000
71,300 Unisys Corp. (a) 1,091,781
------------
8,903,031
- ---------------------------------------------------------------
Environmental Services--1.6%
57,900 Waste Management, Inc. 2,022,881
- ---------------------------------------------------------------
Foods--2.3%
67,300 Dole Food Co., Inc. 3,041,119
- ---------------------------------------------------------------
Hotels--1.6%
61,100 Hilton Hotels Corp. 2,058,306
- ---------------------------------------------------------------
Household & Personal Care Products--1.0%
71,200 The Dial Corp. 1,241,550
- ---------------------------------------------------------------
Industrial Technology/Instruments--1.2%
34,350 Symbol Technologies, Inc. (a) 1,509,253
- ---------------------------------------------------------------
Insurance--5.7%
20,200 CIGNA Corp. 3,762,250
40,300 NAC Re Corp. 2,070,413
47,300 TIG Holdings, Inc. 1,646,631
------------
7,479,294
- ---------------------------------------------------------------
Machinery & Equipment--1.2%
24,200 Case Corp. 1,612,325
- ---------------------------------------------------------------
Manufacturing--1.0%
27,800 Kennametal, Inc. 1,348,300
- ---------------------------------------------------------------
Media--1.6%
8,200 Chris-Craft Industries, Inc. (a) 432,038
60,800 Westinghouse Electric Corp. 1,645,400
------------
2,077,438
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-68
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Portfolio of Investments as PRUDENTIAL JENNISON GROWTH &
of September 30, 1997 INCOME FUND
- --------------------------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
Office Equipment & Supplies--1.8%
28,300 Xerox Corp. $ 2,382,506
- ---------------------------------------------------------------
Oil Services--2.3%
40,400 Baker Hughes, Inc. 1,767,500
27,700 Dresser Industries, Inc. 1,191,100
------------
2,958,600
- ---------------------------------------------------------------
Paper & Forest Products--4.1%
52,500 Boise Cascade Corp. 2,208,281
31,800 Champion International Corp. 1,937,813
79,600 Stone Container Corp. 1,238,775
------------
5,384,869
- ---------------------------------------------------------------
Petroleum--5.3%
29,600 Amerada Hess Corp. 1,825,950
25,200 Anadarko Petroleum Corp. 1,809,675
66,600 Union Pacific Resources Group, Inc. 1,744,087
34,700 Unocal Corp. 1,500,775
------------
6,880,487
- ---------------------------------------------------------------
Pharmaceuticals--0.6%
10,600 Smithkline Beecham PLC (ADR)
(United Kingdom) 518,075
6,400 Vertex Pharmaceuticals, Inc. (a) 241,600
------------
759,675
- ---------------------------------------------------------------
Publishing--7.9%
66,500 American Greetings Corp., Class A 2,452,187
31,300 McGraw-Hill Companies, Inc. 2,118,619
60,900 New York Times Co., Class A 3,197,250
47,100 Tribune Co. 2,511,019
------------
10,279,075
- ---------------------------------------------------------------
Railroads--1.6%
34,300 Union Pacific Corp. 2,148,038
Real Estate--0.5%
19,000 Equity Office Properties Trust $ 644,813
- ---------------------------------------------------------------
Retail--5.1%
37,900 AutoZone, Inc.(a) 1,137,000
39,300 Sears, Roebuck & Co. 2,237,644
136,100 The Limited, Inc. 3,325,943
------------
6,700,587
- ---------------------------------------------------------------
Savings & Loan--1.7%
30,800 Washington Mutual, Inc. 2,148,300
- ---------------------------------------------------------------
Specialty Chemicals--5.2%
28,300 Betzdearborn, Inc. 1,935,012
43,200 Dexter Corp. 1,730,700
30,700 Minerals Technologies, Inc. 1,368,069
50,500 Morton International, Inc. 1,792,750
------------
6,826,531
- ---------------------------------------------------------------
Steel & Metals--2.3%
76,600 J & L Specialty Steel, Inc. 1,029,313
56,600 USX-U.S. Steel Group, Inc. 1,966,850
------------
2,996,163
- ---------------------------------------------------------------
Transportation--1.3%
58,600 Knightsbridge Tankers Ltd. 1,659,113
------------
Total common stocks
(cost $92,552,713) 113,631,460
------------
- ---------------------------------------------------------------
PREFERRED STOCK--0.9%
24,900 USX-U.S. Steel Group, Inc.
Conv., 6.75%
(cost $1,190,955) 1,190,531
------------
Total long-term investments
(cost $93,743,668) 114,821,991
------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-69
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Portfolio of Investments as PRUDENTIAL JENNISON GROWTH &
of September 30, 1997 INCOME FUND
- --------------------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--13.6%
COMMERCIAL PAPER--6.0%
P-1 $ 5,431 Ford Motor Credit Corp.
6.15%, 10/1/97 $ 5,431,000
P-1 2,300 General Electric Capital
Corp.
5.58%, 10/3/97 2,300,000
------------
Total commercial paper
(cost $7,731,000) 7,731,000
------------
U.S. GOVERNMENT SECURITIES--7.6%
10,000(b) United States Treasury
Bills
4.905%, 11/20/97
(cost $9,931,875) 9,931,875
------------
Total short-term
investments
(cost $17,662,875) 17,662,875
------------
- ---------------------------------------------------------------
Total investments before short sales--101.8%
(cost $111,406,543; Note
4) 132,484,866
------------
COMMON STOCKS SOLD SHORT(a)--(3.4%)
- ---------------------------------------------------------------
Beverages--(1.0%)
(22,000) Coca-Cola Co. $ (1,340,625)
- ---------------------------------------------------------------
Household & Personal Care Products--(1.2%)
(23,000) Procter & Gamble Co. (1,588,438)
- ---------------------------------------------------------------
Insurance--(1.2%)
(14,700) American International
Group, Inc. (1,516,856)
------------
Total common stocks sold
short
(proceeds at cost
$4,404,329) (4,445,919)
------------
- ---------------------------------------------------------------
Total investments, net of short sales--98.4% 128,038,947
Other assets in excess of
liabilities--1.6% 2,084,717
------------
Net Assets--100% $130,123,664
============
- ---------------
(a) Non-income producing securities.
(b) $4,560,000 of principal amount pledged as collateral for short sales.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-70
<PAGE>
PRUDENTIAL JENNNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Statement of Assets and Liabilities INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1997
------------------
<S> <C>
Investments, at value (cost $111,406,543)............................................................... $132,484,866
Receivable for securities sold short.................................................................... 4,404,329
Receivable for investments sold......................................................................... 1,369,972
Receivable for Series shares sold....................................................................... 272,964
Dividends and interest receivable....................................................................... 146,457
Due from Broker for securities sold short............................................................... 69,677
Deferred expenses and other assets...................................................................... 13,887
------------
Total assets......................................................................................... 138,762,152
------------
Liabilities
Bank overdraft.......................................................................................... 146,374
Investments sold short, at value (proceeds $4,404,329).................................................. 4,445,919
Payable for investments purchased....................................................................... 3,579,120
Payable for Series shares reacquired.................................................................... 177,712
Accrued expenses........................................................................................ 144,192
Distribution fee payable................................................................................ 82,697
Management fee payable.................................................................................. 62,474
------------
Total liabilities.................................................................................... 8,638,488
------------
Net Assets.............................................................................................. $130,123,664
------------
------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 10,113
Paid-in capital in excess of par..................................................................... 104,506,522
------------
104,516,635
Undistributed net investment income.................................................................. 39,524
Accumulated net realized gain on investments......................................................... 4,530,772
Net unrealized appreciation on investments........................................................... 21,036,733
------------
Net assets, September 30, 1997.......................................................................... $130,123,664
------------
------------
Class A:
Net asset value and redemption price per share
($34,846,059 / 2,704,237 shares of common stock issued and outstanding)........................... $12.89
Maximum sales charge (5.0% of offering price)........................................................ .68
------------
Maximum offering price to public..................................................................... $13.57
============
Class B:
Net asset value, offering price and redemption price per share
($87,557,386 / 6,808,609 shares of common stock issued and outstanding)........................... $12.86
============
Class C:
Net asset value, offering price and redemption price per share
($7,111,341 / 552,989 shares of common stock issued and outstanding).............................. $12.86
============
Class Z:
Net asset value, offering price and redemption price per share
($608,878 / 47,088 shares of common stock issued and outstanding)................................. $12.93
============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-71
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
INCOME FUND
Statement of Operations
- ------------------------------------------------------------
November 7, 1996(a)
Through
Net Investment Income September 30, 1997
-------------------
Income
Dividends (net of foreign
withholding taxes of $2,446).... $ 1,216,996
Interest and discount earned....... 901,679
-----------
Total income.................... 2,118,675
-----------
Expenses
Distribution fee--Class A.......... 60,491
Distribution fee--Class B.......... 560,606
Distribution fee--Class C.......... 50,452
Management fee..................... 513,032
Registration fees.................. 181,000
Reports to shareholders............ 109,000
Custodian's fees and
expenses........................ 108,000
Transfer agent's fees and
expenses........................ 107,000
Legal fees and expenses............ 57,000
Dividends on securities sold
short........................... 21,921
Audit fees......................... 20,000
Directors' fees and expenses....... 10,500
Miscellaneous...................... 8,622
-----------
Total expenses.................. 1,807,624
-----------
Net investment income................. 311,051
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ 4,572,108
Financial futures transactions..... 140,508
Short sales........................ (181,844)
-----------
4,530,772
Net unrealized
appreciation/depreciation on:
Investments........................ 21,078,323
Short sales........................ (41,590)
-----------
21,036,733
-----------
Net gain on investments............... 25,567,505
-----------
Net Increase in Net Assets Resulting
from Operations....................... $25,878,556
-----------
-----------
- --------------------------------------------------------------
(a) Commencement of investment operations.
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
INCOME FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
November 7, 1996(a)
Increase (Decrease) Through
in Net Assets September 30, 1997
-------------------
Operations
Net investment income.............. $ 311,051
Net realized gain on investment
transactions.................... 4,530,772
Net change in unrealized
appreciation of investments..... 21,036,733
-------------
Net increase in net assets
resulting from operations....... 25,878,556
-------------
Dividends from net investment income
(Note 1)
Class A............................ (173,413)
Class B............................ (87,383)
Class C............................ (9,043)
Class Z............................ (1,688)
-------------
(271,527)
-------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares sold...... 125,652,781
Net asset value of shares issued in
reinvestment of dividends....... 248,524
Cost of shares reacquired.......... (21,384,670)
-------------
Net increase in net assets from
Series share transactions....... 104,516,635
-------------
Total increase........................ 130,123,664
Net Assets
Beginning of period................... --
-------------
End of period......................... $ 130,123,664
-------------
-------------
- --------------------------------------------------------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-72
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Notes to Financial Statements 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 mean between the
closing bid and asked prices on such day or at the bid price in the absence of
an asked price 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 mean between the
most recently quoted bid and asked prices provided by a principal market maker
or independent pricing agent. Options on securities and indices traded on an
exchange are valued at the mean between the most recently quoted bid and asked
prices provided by the respective exchange. Futures contracts and options
thereon are valued at the last sales price as of the close of business of the
exchange. Securities for which 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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin". Subsequent payments, known as "variation margin",
are made or received by the Series each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain (loss) on financial futures
contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
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 Series 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. The proceeds received from
the short sale are maintained as collateral for its obligation to deliver the
security upon conclusion of the sale. In addition, the Series may have to make
additional subsequent deposits with the broker equal to the change in the market
value of the security sold short. The Series 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 Series 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.
- --------------------------------------------------------------------------------
B-73
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Notes to Financial Statements INCOME FUND
- --------------------------------------------------------------------------------
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 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.
Such expenses under the plans were .25 of 1%, 1% and 1% of average daily net
assets of the Class A, B and C shares, respectively, for the fiscal year ended
September 30, 1997.
PSI has advised the Series that it has received approximately $182,700 in
front-end sales charges resulting from sales of Class A shares during the period
ended September 30, 1997. From these fees, PSI paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Series that for the period ended September 30, 1997, it
received approximately $124,500 and $1,100 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 Series, 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
Series has not borrowed any amounts pursuant to the Agreement as of September
30, 1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of PIFM,
serves as the Series' transfer agent. During the period ended September 30,
1997, the Series incurred fees of approximately $88,800 for the services of
PMFS. As of September 30, 1997, approximately $10,800 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 September 30, 1997, PSI earned approximately $13,900 in
brokerage commissions from portfolio transactions executed on behalf of the
Series.
- --------------------------------------------------------------------------------
B-74
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Notes to Financial Statements INCOME FUND
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended September 30, 1997 were $134,293,429 and $45,121,869,
respectively.
The cost basis of the investments for federal income tax purposes at September
30, 1997, was $111,465,724 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $21,019,142 (gross unrealized
appreciation-$21,019,566; gross unrealized depreciation--$424).
- ------------------------------------------------------------
Note 5. Capital
The Series 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 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 3 billion shares of $.001 par value common stock authorized which are
divided into three Series, each of which offers four classes, designated Class
A, Class B, Class C and Class Z, each of which consists of 250 million
authorized shares.
Transactions in shares of common stock for the period November 7, 1996
(commencement of investment operations) through September 30, 1997 were as
follows:
Class A Shares Amount
- ------- ---------- -----------
Shares sold........................... 3,742,825 $39,152,598
Shares issued in reinvestment of
dividends........................... 14,160 157,166
Shares reacquired..................... (1,113,963) (12,460,182)
---------- -----------
Net increase in shares outstanding
before conversion................... 2,643,022 26,849,582
Shares issued upon conversion from
Class B............................. 61,215 732,819
---------- -----------
Net increase in shares outstanding.... 2,704,237 $27,582,401
========== ===========
Class B
- -------
Shares sold........................... 7,590,360 $79,524,546
Shares issued in reinvestment of
dividends........................... 7,661 80,973
Shares reacquired..................... (728,030) (8,137,956)
---------- -----------
Net increase in shares outstanding
before conversion................... 6,869,991 71,467,563
Shares reacquired upon conversion into
Class A............................. (61,382) (732,819)
---------- -----------
Net increase in shares outstanding.... 6,808,609 $70,734,744
========== ===========
Class C
- -------
Shares sold........................... 608,639 $ 6,265,784
Shares issued in reinvestment of
dividends........................... 827 8,698
Shares reacquired..................... (56,477) (614,072)
---------- -----------
Net increase in shares outstanding.... 552,989 $ 5,660,410
========== ===========
Class Z
- -------
Shares sold........................... 62,839 $ 709,853
Shares issued in reinvestment of
dividends........................... 146 1,687
Shares reacquired..................... (15,897) (172,460)
---------- -----------
Net increase in shares outstanding.... 47,088 $ 539,080
========== ===========
- --------------------------------------------------------------------------------
B-75
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Financial Highlights INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 7, 1996(a) Through September 30, 1997
-------------------------------------------------------------------
Class A Class B Class C Class Z
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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............................... .09 .02 .02 .10
Net realized and unrealized gain on investment
transactions..................................... 2.87 2.86 2.86 2.92
------- --------- ------- ---------
Total from investment operations................. 2.96 2.88 2.88 3.02
------- --------- ------- ---------
Less distributions
Dividends from net investment income................ (.07) (.02) (.02) (.09)
------- --------- ------- ---------
Net asset value, end of period...................... $ 12.89 $ 12.86 $ 12.86 $ 12.93
======= ========= ======= =========
TOTAL RETURN(c)..................................... 29.72% 28.83% 28.83% 30.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)..................... $34,846 $ 87,558 $ 7,111 $ 609
Average net assets (000)............................ $27,008 $ 62,575 $ 5,631 $ 227
Ratios to average net assets(b):
Expenses, including distribution fees............ 1.58% 2.33% 2.33% 1.33%
Expenses, excluding distribution fees............ 1.33% 1.33% 1.33% 1.33%
Net investment income............................ .90% .15% .15% 1.15%
Portfolio turnover rate............................. 55% 55% 55% 55%
Average commission rate paid per share.............. $ .0588 $ .0588 $ .0588 $ .0588
</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-76
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Report of Independent Accountants INCOME FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Jennison Series Fund, Inc.,
Prudential Jennison Growth & Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Jennison Series Fund,
Inc., Prudential Jennison Growth & Income Fund (the "Fund", one of the
portfolios constituting Prudential Jennison Series Fund, Inc.) at September 30,
1997, and the results of its operations, the changes in its net assets and the
financial highlights for the year then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at September 30, 1997 by
correspondence with the custodian and brokers, and the application of
alternative auditing procedures where securities purchased had not been
received, provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
November 14, 1997
- --------------------------------------------------------------------------------
B-77
<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.
B-78
<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.
B-79
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
GRAPH
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY.
Value of $1.00 invested on 1/1/26 through 12/31/96
Small Stocks - $4,495.99
Common Stocks - $1,370.95
Long-Term Bonds - $33.73
Treasury Bills - $13.54
Inflation - $8.87
Source: Stocks, Bonds, Bills and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future
performances of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment
of any gains. Bond returns are due to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the
New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. Treasury bill returns are
for a one-month bill. Treasuries are guaranteed by the government as to the
timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 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.
[CHART APPEARS HERE]
Historical Total Returns of Different Bond Market Sectors
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7%
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4%
- -------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3%
- -------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD
CORPORATE BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4%
- -------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS(5) 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 10.2 18.8 24.9 30.9 11.0 10.3 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.
II-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 September 30, 1997. It the S&P 500 stock index with and
does not represent the performance without reinvested dividends.
of any Prudential Mutual Fund.
[CHART APPEARS HERE] [CHART APPEARS HERE]
Average Annual Total Returns of Capital Appreciation and
Major World Stock Markets Reinvesting Dividends $ 228,266
12/31/86-9/30/97 (in U.S. Dollars) Capital Appreciation Only $ 80,535
Hong Kong 23.7% Source: Stocks, Bonds, Bills, and
Sweden 22.0% Inflation 1997 Yearbook, Ibbotson
Netherlands 21.3% Associates, Chicago (annually
Spain 21.0% updates work by Roger G. Ibbotson
Belgium 19.7% and Rex A. Sinquefield). Used with
Switzerland 17.5% permission. All rights reserved.
USA 17.1% This chart is used for
UK 17.0% illustrative purposes only and is
France 16.1% not intended to represent the
Germany 12.3% past, present or future
Austria 10.0% performance of any Prudential
Japan 8.8% Mutual Fund. Common stock total
return is based on the Standard &
Poor's 500 Stock Index, a market-
Source: Morgan Stanley Capital value-weighted index made up of
International (MSCI) and Lipper 500 of the largest stocks in the
Analytical Services, Inc. Used U.S. based upon their stock market
with permission. Morgan Stanley value. Investors cannot invest
Country indices are unmanaged directly in indices.
indices which include those stocks
making up the largest two-thirds
of each country's total stock
market capitalization. Returns
reflect the reinvestment of all
distributions. This chart is for
illustrative purposes only and is
not indicative of the past,
present or future performance of
any specific investment. Investors
cannot invest directly in stock
indices.
[CHART APPEARS HERE]
---------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY
REGION
World Total: $12.7 Trillion
U.S. 34.6%
Pacific Basin 20.1%
Europe 42.6%
Canada 2.7%
Source: Morgan Stanley Capital
International, September 30, 1997.
Used with permission. This chart
represents the capitalization of major
world stock markets as measured by the
Morgan Stanley Capital International
(MSCI) World Index. The total market
capitalization is based on the value
of approximately 1577 companies in 22
countries (representing approximately
60% of the aggregate market value of
the stock exchanges). This chart is
for illustrative purposes only and
does not represent the allocation of
any Prudential Mutual Fund.
II-3
<PAGE>
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
(CHART)
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)
- -------
Source: Stocks, Bonds, Bills, and Inflation 1997 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 1926-1996.
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.
II-4
<PAGE>
The following chart, although not relevant to share ownership in a Fund, may
provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of
annual total returns for major stock and bond indices for the period from
December 31, 1976 through December 31, 1996. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-
third U.S. stock (S&P 500), one-third foreign stock (EAFE Index), and one-
third U.S. bonds (Lehman Index) would have eliminated the "highest highs" and
"lowest lows" of any single asset class.
(CHART)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK AND BOND
Indices Over the Past 20 Years
(12/31/76-12/31/96)*
<S> <C> <C>
S&P 500 37.6% -7.2%
EAPE 69.9% -21.2%
Lehman Aggregate 32.6% -2.9%
"Best Returns Zone"
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAPE Index
1/3 Lehman Aggregate Index
</TABLE>
- -------
* Source: Prudential Investment Corporation based on data from Lipper
Analytical New Application (LANA). Past performance is not indicative of
future results. The S&P 500 Index is a weighted, unmanaged index comprised of
500 stocks which provides a broad indication of stock price movements. The
Morgan Stanley EAFE Index is an unmanaged index comprised of 20 overseas stock
markets in Europe, Australia, New Zealand and the Far East. The Lehman
Aggregate Index includes all publicly-issued investment grade debt with
maturities over one year, including U.S. government and agency issues, 15 and
30 year fixed-rate government agency mortgage securities, dollar denominated
SEC registered corporate and government securities, as well as asset-backed
securities. Investors cannot invest directly in stock or bond market indices.
II-5
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "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, 1996. Principal products and services include life and health insurance,
other healthcare products, property and casualty insurance, securities
brokerage, asset management, investment advisory services and real estate
brokerage. Prudential (together with its subsidiaries) employs 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 nearly 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 22 million
life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for more
than 1.6 million cars and insures more than 1.2 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. As of December 31, 1996, Prudential had more than $322 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. In Pensions & Investments,
May 12, 1996, Prudential was ranked third in terms of total assets under
management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers
and agents across the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care
membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
- -------
/1/Prudential Investments serves as the Subadviser to substantially all of the
Prudential Mutual Funds. Wellington Management Company serves as the
subadviser to Global Utility Fund, Inc., Nicholas-Applegate Capital Management
as the subadviser to Nicholas-Applegate Fund, Inc., and Jennison Associates
LLC as the subadviser to Prudential Jennison Series Fund, Inc. There are
multiple subadvisers for The Target Portfolio Trust.
/2/As of December 31, 1996.
III-1
<PAGE>
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of October 31, 1997, Prudential Investments Fund Management is the
seventeenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile.
Prudential Equity Fund is managed with a "value" investment style by PIC. In
1995, Prudential Securities introduced Prudential Jennison Growth Fund, a
growth-style equity fund managed by Jennison Associates LLC, a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of
its kind in the country) along with 100 or so other high yield bonds, which
may be considered for purchase./3/ Non-investment grade bonds, also known as
junk bonds or high yield bonds, are subject to a greater risk of loss of
principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- -------
/3/As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
III-2
<PAGE>
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and foreign
equity trading desks traded $77 million in securities representing over 3.8
million shares with nearly 200 different firms. Prudential Mutual Funds' bond
trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds
tracked by Lipper even have in assets./5/ Prudential Mutual Funds' money
market desk traded $3.2 billion in money market securities on an average day,
or over $800 billion a year. They made a trade every 3 minutes of every
trading day. In 1994, the Prudential Mutual Funds effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On
an annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for
its clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI./7/
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Five Prudential Securities' analysts were ranked as first-team finishers./8/
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect SM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
- -------
/4/Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
/5/Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage funds.
/6/As of December 31, 1994.
/7/As of December 31, 1994.
/8/On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores are
produced by taking the number of votes awarded to an individual analyst and
weighting them based on the size of the voting institution. In total, the
magazine sends its survey to approximately 2,000 institutions and a group of
European and Asian institutions.
III-3
<PAGE>
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
III-4
<PAGE>
===========================
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
===========================
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Donald D. Lennox
Douglas H. McCorkindale
Mendel A. Melzer
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Thomas A. Early, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
Jennison Associates Capital Corp.
466 Lexington Ave.
New York, NY 10017
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
74437E107 MF168E
74437E206 Cat. #42M154R
74437E305
74437E404
Prudential
Jennison
Growth
Fund
========================================
========================================
[PHOTO]
========================================
ANNUAL
REPORT
April 30, 1997
========================================
[LOGO] Prudential
Investments
<PAGE>
Prudential Jennison Growth Fund
A Series of the Prudential Jennison Series Fund, Inc.
Performance At A Glance.
Investors in U.S. stocks broadened their interest over the past 12 months beyond
the familiar brand-name market leaders to include the less well-known and
somewhat smaller companies favored by the Prudential Jennison Growth Fund. A
large proportion of our stocks also were in the two best-performing sectors:
technology and finance. As a result, your Fund generally returned six percentage
points (depending on the share class) more than the average growth fund, as
measured by Lipper Analytical Services.
<TABLE>
<CAPTION>
================================================================================
Cumulative Total Returns(1)
As of 9/30/97
================================================================================
One Since
Year Inception(2)
- -------------------------------------------------------------------------------
<S> <C> <C>
Class A 40.29% 53.90%
- -------------------------------------------------------------------------------
Class B 39.39 51.80
- -------------------------------------------------------------------------------
Class C 39.39 51.80
- -------------------------------------------------------------------------------
Class Z(3) 40.71 49.71
- -------------------------------------------------------------------------------
Lipper Growth Fund Avg(4) 33.52 ***
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Returns(1)
As of 9/30/97
================================================================================
One Since
Year Inception(2)
- -------------------------------------------------------------------------------
<S> <C> <C>
Class A 33.28% 21.99%
- -------------------------------------------------------------------------------
Class B 34.39 22.68
- -------------------------------------------------------------------------------
Class C 38.39 24.41
- -------------------------------------------------------------------------------
Class Z(3) 40.71 31.85
- -------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 5% for Class A
shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years, for Class B shares. Class C shares have a
1% CDSC for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, approximately seven years after purchase.
Class Z shares are not subject to a sales charge or a distribution fee.
(2) Inception dates: 11/2/95 for Class A, B, and C shares; 4/15/96 for Class Z
shares. On 9/20/96 The Prudential Institutional Fund - Growth Stock Fund
merged into the Jennison Growth Fund, Class Z shares.
(3) On September 20, 1996, the assets and liabilities of the Prudential
Institutional Fund -- Growth Stock Fund (Growth Stock Fund) were
transferred to the Prudential Jennison Growth Fund in exchange soley for
Class Z shares of the Fund. The investment objective and policies of both
funds were substantially similar and both shared the same investment
adviser. Accordingly, if you purchased shares of the Growth Stock Fund at
its inception on 11/5/92 and owned them through 9/20/96 (thereby
participating in the fund reorganization), and continued to own Class Z
shares received in the reorganization through 9/30/97, your average annual
total returns after fees and expenses would have been 40.71% for one year;
28.90% for three years; and 21.37% since inception. Your cumulative total
returns would have been 40.71%, 114.22% and 158.39% for the same time
periods, respectively.
(4) These are average returns for the 784 funds in Lipper Analytical Services'
Growth Fund category for the past year.
*** Lipper since inception returns were 56.82% for Class A, B and C shares and
39.05% for Class Z representing all funds in each share class.
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
How Investments Compared.
(As of 9/30/97)
- --------------------------------------------------------------------------------
12-Month 20-Year Average Annual
Total Returns Total Returns
------------- ----------------------
<S> <C> <C>
U.S. Growth Funds
General Bond Funds <plot-points-to-come>
General Muni Debt Funds
Money Market Funds
</TABLE>
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns historically have been lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but historically their returns have been generally among
the lowest of the major investment categories.
<PAGE>
================================================================================
================================================================================
David Poiesz, Fund Manager
Peter Reinemann, Associate Fund Manager
Portfolio
Managers' [PHOTO] [PHOTO]
Report /s/ David Poiesz /s/ Peter Reinemann
The Prudential Jennison Growth Fund invests primarily in stocks of medium and
large companies (generally those with a total market value of at least $1
billion) that we believe have above-average prospects for growth. The Fund may
also invest in stocks of foreign companies, investment grade bonds, and
securities issued or backed by the U.S. government and its agencies, such as
mortgage backed securities. There can be no assurance that the Fund will achieve
its investment objective.
- --------------------------------------------------------------------------------
Our Investment Style.
We are growth investors with a difference. Jennison tries to identify stocks'
potential for earnings growth over the coming 12 to 18 months. We look for firms
that can control their own destinies and have room to grow, so we tend to focus
on medium- to large-sized companies. Because we use a longer time horizon than
many growth investors, we can weather the turbulence, or even benefit, when a
well-managed company has a short-term disappointment.
- --------------------------------------------------------------------------------
Strategy Session.
- --------------------------------------------------------------------------------
Our focus on long-term earnings growth potential not only paid off for us
handsomely this year, it helped us buy inexpensively for future growth.
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
Portfolio Composition.
Sectors expressed as a percentage
of net assets as of 9/30/97.
================================================================================
<S> <C>
Energy 3%
Basic Materials 1%
Technology 34%
Cash 1%
Financial Services 15%
Intermediate Goods & Services 14%
Healthcare 14%
Consumer Staples 13%
Capital Spending 5%
================================================================================
</TABLE>
We were patient. The "rolling bear" in technology has finished its roll.
Oversupplies of cellular phones and personal computers in late 1995 created a
rolling bear market as pressures moved through the supply chain. The last to be
affected were the networking companies, which had become relatively expensive as
the only technology industry that hadn't had a downturn. When these stocks fell
early this year, we bought. After similar corrections in the past, technology
stocks followed up with several years of excellent performance.
We didn't jump ship. Pfizer's share price dropped this past summer because their
marketing and development expenses jumped, but this was because more drugs
received FDA approval than expected. We already owned Pfizer, but we took
advantage of the overreaction to buy about 50% more at a lower price. We think
that analysts will raise next year's earnings estimates.
And we have a wide perspective. We take into account the impact of the business
climate on future earnings.
When interest rates are low, financial stocks historically have risen. Their
business grows because borrowing is cheaper. In addition to some large companies
- -- such as Chase Manhattan Bank and the Mortgage Guarantee Insurance Corporation
(MGIC), a dominant player in the mortgage insurance business -- we own Mutual
Risk Management, a small-cap insurance services company. Financial stocks are
selling at very reasonable price-to-earnings ratios.
<PAGE>
What Went Well.
- --------------------------------------------------------------------------------
Good Companies.
Although we select stocks company by company, our holdings fell predominantly in
the top-performing sectors of the stock market: technology, health care and
financial services. We also benefited from a shift in investor preferences. For
a while, investors pushed prices ever higher on a few dozen of the largest
familiar stocks -- too high in our judgment. We bought less well-known firms
that we thought represented better value. This summer, the market leaders
appeared to hit earnings plateaus and investors looked more widely for
inexpensive stocks. They found us there first, and bid up the prices of our
holdings.
o Among technology stocks, the companies that did well for us included the
computer companies Dell and Compaq, the chipmakers Intel and Texas Instruments,
and the software company Microsoft. The telecommunications company Nokia also
was a big winner for us.
o Schlumberger is an oil services company that is using technology to reduce its
customers' cost of getting oil out of the ground. It is much cheaper to extract
oil today than it was 10 years ago. Our shares performed very well.
o Some drug companies have products that can save lives or help lower the cost
of health care by reducing hospital stays. Much of their sales are in the U.S.,
so an expensive dollar doesn't hurt their earnings as much as some other
multinational companies. Lilly was a large contributor to this year's return.
Our portfolio also includes Pfizer, SmithKline Beecham, Bristol-Myers Squibb and
Warner Lambert.
And Not So Well.
- --------------------------------------------------------------------------------
PhyCor (a health care company) and Monsanto (chemicals) haven't paid off yet,
although we still expect them to. We sold our EDS (data processing) shares after
three earnings disappointments, as well as our investments in Picturetel
(electrical equipment) and Astra (pharmaceuticals).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Largest
Holdings.
<S> <C>
3.5% Pfizer, Inc.
Pharmaceuticals
3.2% Hewlett-Packard Co.
Computer Systems
3.1% Cisco Systems, Inc.
Networking
2.7% Intel Corp.
Electronic Components
2.6% Schlumberger, Ltd.
Oil Services
</TABLE>
Expressed as a percentage of net assets as of 9/30/97.
- --------------------------------------------------------------------------------
Looking Ahead.
- --------------------------------------------------------------------------------
We think our retail stocks still have considerable potential. For example, we
own Sears Roebuck and Kohl's Department stores. The latter is a seven-state
chain of retailers oriented to mid-priced apparel. Its stores are friendly and
efficient and we see them expanding nationwide. Kohl's already has contributed
above-average gains to our return.
We anticipate further strong performance from our technology companies. We
expect Hewlett Packard's growth to accelerate when it introduces its next
generation of servers and printer technology, and our networking stocks are
still recovering from their first quarter slowdown.
We also think business conditions for our pharmaceutical and financial companies
still create substantial long-range potential.
- --------------------------------------------------------------------------------
1
<PAGE>
David Poiesz -- A Different Kind of Growth Investor.
- --------------------------------------------------------------------------------
Portfolio Manager David Poiesz discusses his investment philosophy, the
financial markets and the prospects for future growth.
Q. There are many growth investors. What makes you different?
A. I want to own companies that will produce a portfolio that can grow
earnings about 20% every year. We use a 12- to 18-month time horizon when
forecasting. We like to find companies where an earnings disappointment or
short-term controversy has knocked down the share price or where business
is improving and not yet fully recognized. Then we get a bargain. We focus
on the fundamentals of the business and try not to be misled by earnings
setbacks that are only temporary.
Q. So you are long-term investors?
A. We're not merely "buy-and-hold" investors; we also respond to current
prices. If they get significantly ahead of where we think they should be in
the current market, then we may trim back our holdings a little and wait
for a good opportunity to buy the stock back cheaper.
Q. Which stocks do you follow?
A. We are a mid to large cap manager. (Market capitalization is the market
value of all a company's outstanding shares -- what it would take to buy
the entire company.) We like companies that control their destiny and have
high revenue and unit growth rates. From time to time, the mid caps may be
a quarter or a third of the portfolio. We frequently do well with stocks
that start between $2 billion and $20 billion (as opposed to the $40 to $50
billion large companies).
Q. How large a universe are you looking at?
A. We monitor about 400 stocks. We're generally going to look at any company
with more than $1 billion in capitalization, but we don't follow it if it
doesn't have the growth characteristics we want. We look for unit growth,
profitability, clean balance sheets, management that can capitalize on
opportunities, and a research and development pipeline.
Q. How do you assess long-term growth potential?
A. At Jennison we manage more than $20 billion in equities. At daily morning
meetings, our 17 investment professionals share information and opinions
about the companies they follow. Our analysts meet their management,
suppliers, competitors and customers. We depend on our analysts to make
their own judgments about risk and reward potential using any available
information resources.
Q. Besides stock picking, what goes into selecting a portfolio?
A. We select about 60 companies by looking at risk/return characteristics. We
try to weight the portfolio so that our largest position isn't going to be
our highest risk position, but will provide a modest return. Then, we might
also have a small position with both high risk and high potential return.
Such stocks would be only a small part of the portfolio.
I believe we're more disciplined and less short-term than most growth
managers. I don't think we turn over our portfolio as much as some of our
competitors do. Some managers follow mathematical models that force them to
sell a stock as soon as its growth rate declines for a quarter.
[PHOTO]
/s/ David Poiesz
- --------------------------------------------------------------------------------
2
<PAGE>
President's Letter November 12, 1997
- --------------------------------------------------------------------------------
[PHOTO]
Keep Events In Perspective.
Dear Shareholder:
For investors, the late October decline experienced by the financial markets was
unsettling -- but let's put events in perspective.
October's downturn was the third significant one this year. Stock prices fell
sharply in early spring and dropped again in late summer. Yet following each
episode the financial markets recovered any lost ground. That's very important
because it shows that investors today are not easily swayed by temporary
setbacks -- they choose to stay the course and are investing for the long term.
Despite the recent volatility, it has been a very good year for investors. Plus,
the U.S. economy is strong, inflation remains low, and unemployment is down. At
the end of the sell-off on October 27, the Standard & Poor's 500 Index had still
gained more than 18% for the year. The Dow Jones Industrial Average was also up
11% and the Nasdaq Composite nearly 19%.
Here are a few more thoughts that may help you during times of market
uncertainty:
o Keep your expectations realistic. Seasoned investors know that financial
markets rise and fall -- as will the value of their holdings. Over time,
however, stocks have been shown to produce very attractive returns. As a matter
of fact, the S&P 500 rose more than 280% from the time of the last major market
downturn (October 31, 1987) through December 31, 1996, according to Lipper
Analytical Services.
o Don't make rash decisions. If you have an investment plan, stick to it. While
past performance is not indicative of future results, historically, investors
have profited by taking advantage of the long-term growth potential of U.S.
stocks.
o We're on your side. Your Prudential Securities Financial Advisor or Pruco
Securities Registered Representative can help you understand what's happening in
the financial markets. Why not call him or her today?
Thank you for your continued confidence in Prudential Mutual Funds and
Annuities. We'll do everything we can to keep you informed and to earn your
trust.
Sincerely,
/s/ Brian M. Storms
Brian M. Storms
President, Prudential Mutual Funds & Annuities
- --------------------------------------------------------------------------------
3
<PAGE>
Portfolio of Investments as PRUDENTIAL JENNISON SERIES FUND, INC.
of September 30, 1997 PRUDENTIAL JENNISON GROWTH FUND
- -----------------------------------------------------------------------
Shares Description Value (Note 1)
- -----------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.9%
COMMON STOCKS--98.9%
- -----------------------------------------------------------------------
Aerospace/Defense--2.5%
325,000 Boeing Co. $ 17,692,188
396,000 Gartner Group, Inc. 11,880,000
--------------
29,572,188
- -----------------------------------------------------------------------
Banks & Financial Services--8.0%
218,900 Chase Manhattan Corp. 25,830,200
260,900 MBNA Corp. 10,566,450
421,390 Morgan Stanley, Dean Witter,
Discover & Co. 22,781,397
399,600 Schwab (Charles) Corp. 14,285,700
329,400 Washington Mutual, Inc. 22,975,650
--------------
96,439,397
- -----------------------------------------------------------------------
Business Services--6.3%
627,425 CUC International, Inc.(a) 19,450,175
377,600 Eagle River Interactive, Inc.(a) 4,059,200
318,800 Manpower, Inc. 12,592,600
276,500 Omnicom Group, Inc. 20,115,375
269,800 Reuters Holdings PLC (ADR)
(United Kingdom) 19,223,250
--------------
75,440,600
- -----------------------------------------------------------------------
Cellular Communications--0.9%
214,600 Vodafone Group PLC (ADR) (United
Kingdom) 11,534,750
- -----------------------------------------------------------------------
Chemicals--1.5%
460,000 Monsanto Co. 17,940,000
- -----------------------------------------------------------------------
Computer Systems/Peripherals--10.0%
404,800 Compaq Computer Corp.(a) 30,258,800
218,400 Dell Computer Corp.(a) 21,157,500
362,700 Diebold, Inc. 17,182,913
558,900 Hewlett-Packard Co. 38,878,481
116,400 International Business Machines
Corp. 12,331,125
--------------
119,808,819
Diversified Operations--1.2%
206,700 General Electric Co. $ 14,068,519
- -----------------------------------------------------------------------
EDP Software & Services--3.6%
339,400 Intuit, Inc.(a) 10,860,800
130,400 Microsoft Corp. (a) 17,253,550
165,500 SAP AG (ADR)(Germany) 14,728,110
--------------
42,842,460
- -----------------------------------------------------------------------
Electronic Components--6.7%
348,800 Intel Corp. 32,198,600
610,400 International Rectifier Corp.(a) 14,268,100
372,200 LSI Logic Corp. (a) 11,956,925
161,800 Texas Instruments, Inc. 21,863,225
--------------
80,286,850
- -----------------------------------------------------------------------
Health Care Services--2.7%
628,700 Healthsouth Corp.(a) 16,778,431
536,000 PhyCor, Inc.(a) 15,577,500
--------------
32,355,931
- -----------------------------------------------------------------------
Hotels--2.5%
237,800 Doubletree Corp.(a) 11,473,850
541,200 Hilton Hotels Corp. 18,231,675
--------------
29,705,525
- -----------------------------------------------------------------------
Household & Personal Care Products--1.3%
176,700 Gillette Co. 15,251,419
- -----------------------------------------------------------------------
Industrial Technology/Instruments--4.3%
173,500 Applied Materials, Inc.(a) 16,525,875
248,500 KLA Tencor Corp.(a) 16,789,281
426,700 Symbol Technologies, Inc. 18,748,131
--------------
52,063,287
- -----------------------------------------------------------------------
See Notes to Financial Statements.
4
<PAGE>
Portfolio of Investments as PRUDENTIAL JENNISON SERIES FUND, INC.
of September 30, 1997 PRUDENTIAL JENNISON GROWTH FUND
- -----------------------------------------------------------------------
Shares Description Value (Note 1)
- -----------------------------------------------------------------------
Insurance--7.2%
82,900 CIGNA Corp. $ 15,440,125
316,800 MGIC Investment Corp. 18,156,600
327,533 Mutual Risk Management, Ltd. 16,642,771
218,300 Provident Companies, Inc. 15,267,356
448,700 UNUM Corp. 20,471,937
--------------
85,978,789
- -----------------------------------------------------------------------
Machinery--1.1%
193,800 Case Corp. 12,911,925
- -----------------------------------------------------------------------
Media--2.7%
278,300 Clear Channel Communications,
Inc.(a) 18,054,712
181,100 The Walt Disney Co. 14,601,188
--------------
32,655,900
- -----------------------------------------------------------------------
Networking--5.4%
533,200 3Com Corp.(a) 27,326,500
512,000 Cisco Systems, Inc. (a) 37,408,000
--------------
64,734,500
- -----------------------------------------------------------------------
Oil Services--2.6%
368,600 Schlumberger, Ltd. 31,031,512
- -----------------------------------------------------------------------
Pharmaceuticals--11.2%
150,200 Boston Scientific Corp. (a) 8,289,163
246,100 Bristol-Myers Squibb Co. 20,364,775
224,400 Eli Lilly & Co. 27,026,175
689,200 Pfizer, Inc. 41,395,075
523,700 Smithkline Beecham PLC (ADR)
(United Kingdom) 25,595,837
91,100 Warner-Lambert Co. 12,292,806
--------------
134,963,831
- -----------------------------------------------------------------------
Retail--8.5%
216,100 AutoZone, Inc.(a) 6,483,000
662,500 Corporate Express, Inc.(a) 13,995,313
455,925 Dollar General Corp. 15,529,945
355,600 Gap, Inc. 17,802,225
207,600 Home Depot, Inc. $ 10,821,150
249,700 Kohl's Corp.(a) 17,728,700
336,800 Sears, Roebuck & Co. 19,176,550
--------------
101,536,883
- -----------------------------------------------------------------------
Telecommunication Services--1.3%
437,800 AirTouch Communications, Inc.(a) 15,514,538
15,000 RSL Communications, Ltd.(a) 330,000
--------------
15,844,538
- -----------------------------------------------------------------------
Telecommunications Equipment--5.6%
190,400 Ciena Corp.(a) 9,430,750
286,600 Motorola, Inc. 20,599,375
242,500 Nokia Corp. (ADR)(Finland) 22,749,531
287,100 Tellabs, Inc.(a) 14,785,650
--------------
67,565,306
- -----------------------------------------------------------------------
Trucking & Shipping--1.8%
278,100 Federal Express Corp.(a) 22,248,000
--------------
Total long-term investments
(cost $853,003,444) 1,186,780,929
--------------
Moody's Principal
Rating Amount
(Unaudited) (000)
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENT--0.9%
Commercial Paper--0.9%
P1 $10,159 Ford Motor Credit Co.
6.15%, 10/1/97
(cost $10,159,000) 10,159,000
- -----------------------------------------------------------------------
Total Investments--99.8%
(cost $863,162,444;
Note 4) 1,196,939,929
Other assets in excess
of liabilities--0.2% 2,489,931
---------------
Net Assets--100% $ 1,199,429,860
===============
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- -----------------------------------------------------------------------
See Notes to Financial Statements.
5
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Statement of Assets and Liabilities PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1997
------------------
<S> <C>
Investments, at value (cost $863,162,444).............................................. $1,196,939,929
Cash................................................................................... 1,132,392
Receivable for investments sold........................................................ 5,014,392
Receivable for Series shares sold...................................................... 4,739,703
Dividends and interest receivable...................................................... 652,640
Deferred expenses and other assets..................................................... 135,543
--------------
Total assets........................................................................ 1,208,614,599
--------------
Liabilities
Payable for investments purchased...................................................... 6,036,257
Payable for Series shares reacquired................................................... 1,919,751
Management fee payable................................................................. 570,278
Distribution fees payable.............................................................. 378,572
Accrued expenses and other liabilities................................................. 262,783
Withholding taxes payable.............................................................. 17,098
--------------
Total liabilities................................................................... 9,184,739
--------------
Net Assets............................................................................. $1,199,429,860
==============
Net assets were comprised of:
Common stock, at par................................................................ $ 78,191
Paid-in capital in excess of par.................................................... 784,299,181
--------------
784,377,372
Accumulated net realized gain on investments........................................ 81,276,520
Net unrealized appreciation on investments.......................................... 333,775,968
--------------
Net assets, September 30, 1997......................................................... $1,199,429,860
==============
Class A:
Net asset value and redemption price per share
($145,022,025 / 9,421,277 shares of common stock issued and outstanding)......... $15.39
Maximum sales charge (5% of offering price)......................................... .81
------
Maximum offering price to public.................................................... $16.20
======
Class B:
Net asset value, offering price and redemption price per share
($419,405,140 / 27,634,577 shares of common stock issued and outstanding)........ $15.18
======
Class C:
Net asset value, offering price and redemption price per share
($25,133,800 / 1,656,067 shares of common stock issued and outstanding).......... $15.18
======
Class Z:
Net asset value, offering price and redemption price per share
($609,868,895 / 39,477,787 shares of common stock issued and outstanding)........ $15.45
======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
6
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Operations
- --------------------------------------------------------------
Year Ended
September 30,
Net Investment Income (Loss) 1997
-------------
Income
Dividends (net of foreign withholding taxes
of $185,509)............................ $ 6,429,231
Interest................................... 967,368
-------------
Total income............................ 7,396,599
-------------
Expenses
Management fee............................. 5,276,337
Distribution fee--Class A.................. 264,954
Distribution fee--Class B.................. 2,994,762
Distribution fee--Class C.................. 182,481
Transfer agent's fees and expenses......... 1,376,000
Reports to shareholders.................... 235,000
Registration fees.......................... 233,000
Custodian's fees and expenses.............. 128,000
Legal fees and expenses.................... 65,000
Amortization of deferred organization
expense................................. 37,967
Audit fee.................................. 20,000
Insurance expense.......................... 12,000
Directors' fees and expenses............... 10,500
Miscellaneous.............................. 11,912
-------------
Total expenses.......................... 10,847,913
-------------
Net investment income (loss).................. (3,451,314)
-------------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions............................... 90,453,012
Net change in unrealized appreciation on
investments................................ 224,732,097
-------------
Net gain on investments....................... 315,185,109
-------------
Net Increase in Net Assets
Resulting from Operations..................... $311,733,795
=============
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
November 2, 1995(a)
Year Ended Through
Increase (Decrease) September 30, September 30,
in Net Assets 1997 1996
------------- -------------------
Operations
Net investment income
(loss)............... $ (3,451,314) $ (2,046,837)
Net realized gain (loss)
on investments....... 90,453,012 (9,176,492)
Net change in unrealized
appreciation on
investments.......... 224,732,097 36,196,257
-------------- --------------------
Net increase in net
assets resulting from
operations........... 311,733,795 24,972,928
-------------- --------------------
Series share transactions
(net of share
conversions) (Note 5)
Net proceeds from shares
sold................. 859,180,110 819,026,956
Cost of shares
reacquired........... (666,161,401) (149,422,528)
-------------- --------------------
Net increase in net
assets from Series
share transactions... 193,018,709 669,604,428
-------------- --------------------
Total increase............. 504,752,504 694,577,356
Net Assets
Beginning of period........ 694,677,356 100,000
-------------- --------------------
End of period.............. $1,199,429,860 $ 694,677,356
============== ====================
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
7
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
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 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.
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 mean between the
closing bid and asked prices on such day or at the bid price in the absence of
an asked price, 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 mean between the
most recently quoted bid and asked prices provided by a principal market maker
or independent pricing agent. Options on securities and indices traded on an
exchange are valued at the mean between the most recently quoted bid and asked
prices provided by the respective exchange. Futures contracts and options
thereon are valued at the last sales price as of the close of business of the
exchange. Securities for which 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 and is net of
discount accretion and premium amortization. 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 continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Series' understanding of the applicable country's tax rules and rates.
Deferred Organization Expenses: Approximately $200,000 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.
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. For the year ended
September 30, 1997, the Series reclassified current net operating losses by
decreasing accumulated net investment loss and decreasing paid-in capital by
$3,451,314. Net investment income, net realized gains, and net assets were not
affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to a subadvisory
agreement between PIFM and Jennison Associates Capital
- --------------------------------------------------------------------------------
8
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
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 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.
Such expenses under the plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the fiscal year ended
September 30, 1997.
PSI has advised the Series that it has received approximately $608,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended September 30, 1997. From these fees, PSI paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Series that for the year ended September 30, 1997, it
received approximately $727,100 and $5,600 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
$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
Series has not borrowed any amounts pursuant to the Agreement as of September
30, 1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended September 30, 1997,
the Series incurred fees of approximately $1,236,000 for the services of PMFS.
As of September 30, 1997, approximately $122,000 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 year ended September 30, 1997, PSI earned approximately $50,600 in
brokerage commissions from portfolio transactions executed on behalf of the
Series.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1997 were $724,562,581 and $541,374,570,
respectively.
The cost of investments for federal income tax purposes at September 30, 1997,
was $864,345,826 and, accordingly, net unrealized appreciation of investments
for federal income tax purposes was $332,594,103 (gross unrealized
appreciation--$343,656,967; gross unrealized depreciation--$11,062,864).
- ------------------------------------------------------------
Note 5. Capital
The Series 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
- --------------------------------------------------------------------------------
9
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
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.
There are 3 billion shares of $.001 par value common stock authorized which are
divided into three series, each of which offers four classes, designated Class
A, Class B, Class C and Class Z, each of which consists of 250 million
authorized shares. Of the shares outstanding at September 30, 1997, PIFM owned
10,000 shares of the Series.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ------- ----------- -------------
Year ended September 30, 1997
Shares sold........................ 25,998,077 $ 330,048,473
Shares reacquired.................. (24,630,004) (310,892,744)
----------- -------------
Net increase in shares outstanding
before conversion................ 1,368,073 19,155,729
Shares issued upon conversion from
Class B.......................... 263,019 3,525,367
----------- -------------
Net increase in shares
outstanding...................... 1,631,092 $ 22,681,096
=========== =============
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
- -------
Year ended September 30, 1997
Shares sold........................ 11,358,438 $ 145,846,890
Shares reacquired.................. (4,716,088) (59,467,575)
----------- -------------
Net increase in shares outstanding
before conversion................ 6,642,350 86,379,315
Shares reacquired upon conversion
into Class A..................... (266,196) (3,525,367)
----------- -------------
Net increase in shares
outstanding...................... 6,376,154 $ 82,853,948
=========== =============
Class B Shares Amount
- ------- ----------- -------------
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
=========== =============
Class C
- -------
Year ended September 30, 1997
Shares sold........................ 560,427 $ 7,367,068
Shares reacquired.................. (307,304) (3,823,506)
----------- -------------
Net increase in shares
outstanding...................... 253,123 $ 3,543,562
=========== =============
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
- -------
Year ended September 30, 1997
Shares sold........................ 30,018,513 $ 375,917,679
Shares reacquired.................. (23,558,475) (291,977,576)
----------- -------------
Net increase in shares
outstanding...................... 6,460,038 $ 83,940,103
=========== ===========
April 15, 1996(b) through
September 30, 1996
Shares sold........................ 2,971,624 $ 32,570,435
Shares issued due to acquisition of
The Prudential Institutional
Fund--Growth Stock 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
=========== =============
- ---------------
(a) Commencement of investment operations.
(b) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
10
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Financial Highlights PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------- ------------------------------- -------------
November 2, November 2,
Year 1995(a) Year 1995(a) Year
Ended Through Ended Through Ended
September 30, September 30, September 30, September 30, September 30,
1997 1996 1997 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <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
------------- ------ ------------- ------------- ------
Income from investment operations
Net investment income (loss)(d)..... (.03) (.03) (.12) (.10) (.12)
Net realized and unrealized gain on
investment transactions.......... 4.45 1.00 4.41 .99 4.41
------------- ------ ------------- ------------- ------
Total from investment
operations.................... 4.42 .97 4.29 .89 4.29
------------- ------ ------------- ------------- ------
Net asset value, end of period...... $ 15.39 $ 10.97 $ 15.18 $ 10.89 $ 15.18
============= ====== ============= ============= ======
TOTAL RETURN(c)..................... 40.29% 9.70% 39.39% 8.90% 39.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)..... $ 145,022 $85,440 $ 419,405 $ 231,541 $25,134
Average net assets (000)............ $ 105,982 $70,667 $ 299,476 $ 162,412 $18,248
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.09% 1.23%(e) 1.84% 1.98%(e) 1.84%
Expenses, excluding distribution
fees.......................... .84% .98%(e) .84% .98%(e) .84%
Net investment income (loss)..... (.25)% (.37)%(e) (1.00)% (1.12)%(e) (1.00)%
Portfolio turnover rate............. 63% 42% 63% 42% 63%
Average commission rate paid per
share............................ $ .0596 $ .0611 $ .0596 $ .0611 $ .0596
<CAPTION>
Class Z
-------------------------------
November 2, April 15,
1995(a) Year 1996(b)
Through Ended Through
September 30, September 30, September 30,
1996 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................... $ 10.00 $ 10.98 $ 10.32
------ ------------- -------------
Income from investment operations
Net investment income (loss)(d)..... (.10) -- (.02)
Net realized and unrealized gain on
investment transactions.......... .99 4.47 .68
------ ------------- -------------
Total from investment
operations.................... .89 4.47 .66
------ ------------- -------------
Net asset value, end of period...... $ 10.89 $ 15.45 $ 10.98
====== ============= =============
TOTAL RETURN(c)..................... 8.90% 40.71% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)..... $15,281 $ 609,869 $ 362,416
Average net assets (000)............ $12,550 $ 455,684 $ 26,829
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.98%(e) .84% .98%(e)
Expenses, excluding distribution
fees.......................... .98%(e) .84% .98%(e)
Net investment income (loss)..... (1.12)%(e) -- (.12)%(e)
Portfolio turnover rate............. 42% 63% 42%
Average commission rate paid per
share............................ $ .0611 $ .0596 $ .0611
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Commencement of offering of Class Z shares.
(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.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Jennison Series Fund, Inc., Prudential Jennison Growth Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Jennison Series Fund,
Inc., Prudential Jennison Growth Fund (the 'Fund', one of the portfolios
constituting Prudential Jennison Series Fund, Inc.) at September 30, 1997, and
the results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at September 30, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased had not been received, provides a reasonable basis for the
opinion expressed above. The accompanying statement of changes in net assets and
the financial highlights for the period ended September 30, 1996 were audited by
other independent accountants, whose opinion dated November 4, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
November 14, 1997
PRUDENTIAL JENNISON SERIES FUND, INC.
Change of Auditors PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the period ended September 30, 1996, Deloitte & Touche LLP
expressed an unqualified opinion on the Series' financial statements. There were
no disagreements between Fund management and Deloitte & Touche LLP prior to
their termination. The Board of Directors approved the termination of Deloitte &
Touche LLP and the appointment of Price Waterhouse LLP as the Fund's independent
accountants.
- --------------------------------------------------------------------------------
12
<PAGE>
Comparing A $10,000 Investment.
- -------------------------------
Prudential Jennison Growth Fund vs.
the S&P 500 Index.
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, will be
worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Jennison Growth Fund (Class A,
Class B, Class C and Class Z) with a similar investment in the S&P 500 Index
(the Index) by portraying the initial account values at the commencement of
operations of each class, and subsequent account values at the end of this
reporting period (September 30), as measured on a quarterly basis, beginning in
1995 for Class A, Class B and Class C shares; and in 1996 for Class Z shares.
For purposes of the graphs, and unless otherwise indicated, in the accompanying
tables it has been assumed (a) that the maximum applicable front-end sales
charge was deducted from the initial $10,000 investment in Class A shares; (b)
the maximum applicable contingent deferred sales charge was deducted from the
value of the investment in Class B and Class C shares, assuming full redemption
on September 30, 1997; (c) all recurring fees (including management fees) were
deducted; and (d) all dividends and distributions were reinvested. Class B
shares will automatically convert to Class A shares, on a quarterly basis,
beginning approximately seven years after purchase. This conversion feature is
not reflected in the graph. Class Z shares are not subject to a sales charge or
a distribution fee.
The S&P 500 is a capital-weighted index, representing the aggregate market value
of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the reinvestment of all
dividends, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Fund. The securities in the S&P 500
may differ substantially from the securities in the Fund. The S&P 500 is not the
only index that may be used to characterize performance of stock funds and other
indexes may portray different comparative performance.
[THE FOLLOWING TABLES WERE REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class A
=======
11/2/95 9/30/97
------- -------
<S> <C> <C>
Prudential Jennison
Growth Fund $10,000 $14,621
S&P 500 Index $10,000 $16,957
</TABLE>
Average Annual Total
Returns - Class A
--------------------
With Sales Load
21.99% Since Inception
33.28% for 1 Year
Without Sales Load
25.31% Since Inception
40.29% for 1 Year
[THE FOLLOWING TABLES WERE REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class B
=======
11/2/95 9/30/97
------- -------
<S> <C> <C>
Prudential Jennison
Growth Fund $10,000 $14,780
S&P 500 Index $10,000 $16,957
</TABLE>
Average Annual Total
Returns - Class B
--------------------
With Sales Load
22.68% Since Inception
34.39% for 1 Year
Without Sales Load
24.41% Since Inception
39.39% for 1 Year
[THE FOLLOWING TABLES WERE REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class C
=======
11/2/95 9/30/97
------- -------
<S> <C> <C>
Prudential Jennison
Growth Fund $10,000 $15,180
S&P 500 Index $10,000 $16,957
</TABLE>
Average Annual Total
Returns - Class C
--------------------
With Sales Load
24.41% Since Inception
38.39% for 1 Year
Without Sales Load
24.41% Since Inception
39.39% for 1 Year
[THE FOLLOWING TABLES WERE REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class Z
=======
4/15/96 9/30/97
------- -------
<S> <C> <C>
Prudential Jennison
Growth Fund $10,000 $14,970
S&P 500 Index $10,000 $14,906
</TABLE>
Average Annual Total
Returns - Class Z
--------------------
Without Sales Load
31.85% Since Inception
40.71% for 1 Year
<PAGE>
===========================
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
===========================
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Donald D. Lennox
Douglas H. McCorkindale
Mendel A. Melzer
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Susan C. Cote, Vice President
Thomas A. Early, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
74435J108 MF142E
74435J207 Cat. #444365Y
74435J306
74435J405
Prudential
Multi-Sector
Fund, Inc.
========================================
========================================
[PHOTO]
========================================
ANNUAL
REPORT
April 30, 1997
========================================
[LOGO] Prudential
Investments
<PAGE>
Prudential Multi-Sector Fund, Inc.
Performance At A Glance.
While small and medium-sized companies delivered positive returns over the past
12 months, they trailed larger company stocks. So while we are pleased to report
that your Fund performed better than the average capital appreciation mutual
fund during the past year (as measured by Lipper Analytical Services), we must
note that neither did as well as the broad stock market (as measured by the
Standard & Poor's 500 Index). That's because of the growth-style, sector-based
strategy of your Fund, which led us to invest in small and mid-sized companies.
<TABLE>
<CAPTION>
================================================================================
Cumulative Total Returns(1)
As of 4/30/97
================================================================================
One Five Since
Year Years Inception(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 5.2% 87.1% 116.5%
- -------------------------------------------------------------------------------
Class B 4.4 80.0 105.3
- -------------------------------------------------------------------------------
Class C 4.4 N/A 33.4
- -------------------------------------------------------------------------------
Class Z 5.5 N/A 9.3
- -------------------------------------------------------------------------------
Lipper Capital
Appreciation Fund Avg(3) 3.0 86.3 ***
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Returns(1)
As of 3/31/97
================================================================================
One Five Since
Year Years Inception(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 0.8% 11.5% 10.8%
- --------------------------------------------------------------------------------
Class B 0.3 11.7 10.8
- --------------------------------------------------------------------------------
Class C 4.3 N/A 10.2
- --------------------------------------------------------------------------------
Class Z 6.3 N/A 5.6
- --------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 5% for Class A
shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years for Class B shares. Class C shares have a
1% CDSC for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, approximately seven years after purchase.
Class Z shares are not subject to a sales charge or a distribution fee.
(2) Inception dates: 6/29/90 Class A and B; 8/1/94 Class C; 3/1/96 Class Z.
(3) Lipper average returns are for 204 funds for one year and 77 funds for five
years.
*** Lipper Since Inception category cumulative return are: Class A and B,
124.1% for 70 funds; Class C, 44.9% for 128 funds; and Class Z, 7.5% for
202 funds.
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
How Investments Compared.
(As of 4/30/97)
================================================================================
12-Month 20-Year Average
Total Returns Annual Total Returns
------------- --------------------
<S> <C> <C>
U.S. Growth Funds <plot-points-to-come>
General Bond Funds
General Muni Debt Funds
U.S. Taxable Money Funds
</TABLE>
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds. General Municipal Debt Funds invest in bonds issued by
state governments, state agencies and/or municipalities. This investment
provides income that is usually exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
================================================================================
================================================================================
Greg Goldberg and Jeffrey T. Rose, Fund Managers
Portfolio [PHOTO] [PHOTO]
Managers'
Report /s/ Greg Goldberg /s/ Jeffrey T. Rose
The Fund seeks long-term capital growth by investing primarily in domestic and
foreign stocks of companies in specific economic sectors, and makes significant
shifts among these sectors based on world economic changes and other investment
trends. We select stocks following a growth investment style, looking for stocks
with above-average revenue and earnings growth forecast and that are
attractively priced. The Fund may be affected to a greater extent by any single
economic, political or regulatory development than a mutual fund that does not
focus its investments on specific economic sectors. There can be no assurance
the Fund will achieve its investment objective.
- --------------------------------------------------------------------------------
Sectors & Stocks.
Since its inception, the Prudential Multi-Sector Fund has followed the sector
selection of Greg Smith, Chief Investment Strategist at Prudential Securities,
and the securities selection of its portfolio managers. We've decided to put
sector and security selection in one place. Effective June 2, Portfolio Managers
Greg Goldberg and Jeff Rose, who have been selecting securities, will also
select sectors.
- --------------------------------------------------------------------------------
Strategy Session.
- --------------------------------------------------------------------------------
We invest in sectors that we believe may perform better than the market as a
whole in the short term, and try to avoid those that might do worse. As a
result, we frequently adjust our holdings to take advantage of changing market
conditions.
So over the past 12 months we added to our positions in energy and healthcare
stocks while we reduced our holdings in technology and financial services.
o Energy: A year ago, we did not hold any investments here. Today, it's our
second largest sector. Energy companies have been benefitting from global
growth. Though we expect some volatility in the short term, we believe the trend
is up for energy prices over the long haul.
o Healthcare: Over the past 12 months we have increased our healthcare holdings.
An aging worldwide population is increasing demand for drugs and healthcare,
which should continue to benefit companies in this industry.
Over the last 12 months, we've nearly halved our technology holdings. While we
believe in this sector for the long term, we feel that the months ahead will be
difficult.
We also sold a small portion of our financial services holdings because we were
concerned that interest rates could continue to rise.
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 4/30/97.
================================================================================
<S> <C>
Industrial 4%
Consumer Growth
& Cyclical 26%
Energy 24%
Technology 18%
Finance 16%
Consumer Cyclical 7%
Cash/Other 5%
================================================================================
</TABLE>
<PAGE>
What Went Well.
- --------------------------------------------------------------------------------
Riding the Tech Rally.
It's not always easy to get your timing right in the volatile technology sector,
but we were pleased with our decision to sell most of our shares in Cisco
Systems, the leader in computer networking. We sold the stock at a profit after
it had appreciated significantly. We were glad we did, because by the end of
this reporting period it was well off its highs.
We've also had a great deal of success with Intel, which more than doubled in
price during the last 12 months. We believe Intel will continue to perform well
as it complements its PC chip strengths with its move into networking.
Financials Pay Off.
The continuing strong performance of financial services stocks also helped the
Fund. Travelers, a conglomerate offering insurance, brokerage and other
financial services, rose 83% over the last 12 months. Smith Barney, the firm's
securities brokerage subsidiary, posted substantial profits, buoyed by the
strong financial markets.
Bits and Pieces.
Within the energy sector, drill bit maker Smith International was up 63% over
the 12 months. You can't drill for oil without bits, so Smith, the leading drill
bit manufacturer, benefited from increased drilling activity worldwide. In
healthcare, Aetna/U.S. Healthcare's transformation into an HMO force helped it
rise 29%.
And Not So Well.
- --------------------------------------------------------------------------------
The Crushing Technology Wave.
Technology stocks are volatile -- almost by definition -- and many of these
stocks fell in price late in our reporting period. While we did hold some
winners in technology, our relatively large position as much as 32% of total
investments during the last year prevented us from performing as well as the
broader stock market. We may now look to this sector for buying opportunities.
One victim of the crushing technology wave was Westell, on the cutting edge of
ADSL technology which is bringing internet services to the home. The firm's
stock lost half its value as anticipated contracts with telecommunications
providers were delayed by mergers and regulatory concerns in the
telecommunications industry. Still, we expect its price to rebound as conditions
in the telecommunications industry improve.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Five Largest
Holdings.
<S> <C>
3.9% Novartis A.G. (A.D.R.)
Healthcare
3.5% Exxon Corp.
Energy
2.9% Uniphase Corp.
Technology
2.8% Aetna, Inc.
Healthcare
2.5% UCAR International Inc.
Precious metals
</TABLE>
Expressed as a percentage of total investments as of 4/30/97.
- --------------------------------------------------------------------------------
Looking Ahead.
- --------------------------------------------------------------------------------
The U.S. stock market is now in its sixth year of a bull market. We're still
cautious in the short term for two reasons: 1) valuations are historically high,
especially in the so-called "Nifty Fifty" large company stocks and 2) interest
rates may very well rise further. Nevertheless, we will continue to look for
individual sectors and industries that may perform better than the market as a
whole.
We will be watching financial services closely. While prices in this sector are
currently attractive, stocks could be hurt if interest rates rise significantly.
We will await the Federal Reserve's decision.
- --------------------------------------------------------------------------------
1
<PAGE>
President's Letter June 9, 1997
- --------------------------------------------------------------------------------
[PHOTO]
Staying The Course.
Dear Shareholder:
With the midpoint of 1997 upon us, I'm pleased to report that the recent news
from the financial markets has been decidedly upbeat. The Dow Jones Industrial
Average has gained nearly 17% through mid-June, while lower long-term interest
rates have made bonds an attractive investment.
This stands in contrast to April when the Dow fell 10% from a record high on
fears of higher interest rates and surging inflation. Interest rates have since
fallen as the economy slowed and the Dow has reached several new highs.
The market swings we've seen this year illustrate the importance of "staying the
course" to your financial goal. We realize that maintaining investment
discipline when faced with market uncertainty isn't easy. Here are some thoughts
that may help:
o Keep Your Expectations Realistic. The best investors know that financial
markets rise and fall -- and so too, will the value of their investments.
Over time, however, stocks have been shown to produce very attractive
returns that were well ahead of inflation.
o Remember Your Time Horizon. If your investment goals are long term (several
years or more), so should your time horizon. During this period, it's not
unusual for stocks and bonds to experience several periods of market
uncertainty.
o We're On Your Side. Your Prudential Securities Financial Advisor or Pruco
Securities Registered Representative can help you understand what's
happening in the financial markets. They can assist you in making informed
decisions based upon a thorough knowledge of your financial needs and
long-term goals. Call him or her today.
Thank you for your continued confidence in Prudential mutual funds. We'll do
everything we can to keep you informed and to earn your trust.
Sincerely,
/s/ Brian M. Storms
Brian M. Storms
President, Prudential Mutual Funds & Annuities
- --------------------------------------------------------------------------------
---
2
---
<PAGE>
Portfolio of Investments as
of April 30, 1997 PRUDENTIAL MULTI-SECTOR FUND, INC.
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--97.1%
COMMON STOCKS--96.8%
- ---------------------------------------------------------------
Auto Sector--0.8%
68,632 LucasVarity PLC (ADR) (United
Kingdom) (a) $ 2,058,960
113,850 Miller Industries, Inc. (a) 1,351,969
------------
3,410,929
- ---------------------------------------------------------------
Basic Industry Sector-->1.8%
406,700 Agrium, Inc. (Canada) 5,219,322
177,200 Polymer Group, Inc. (a) 2,259,300
------------
7,478,622
- ---------------------------------------------------------------
Consumer Goods & Services Sector--4.0%
45,000 Mattel, Inc. 1,254,375
268,400 RJR Nabisco Holdings Corp. 7,984,900
99,400 Stone Container Corp. (a) 1,006,425
32,700 The Unilever Group (a) 6,417,375
------------
16,663,075
- ---------------------------------------------------------------
Energy Sector--23.9%
176,900 Alberta Energy Co., Ltd. (a) 3,781,237
96,000 Anadarko Petroleum Corp. 5,268,000
153,400(b) BJ Services Co. (a) 7,228,975
299,700 Bouygues Offshore S.A. (ADR) (a) 3,746,250
34,500 Diamond Offshore Drilling, Inc.
(a) 2,220,938
175,600 Elf Aquitaine S.A. (ADR) (France)
(a) 8,538,550
254,400(b) Exxon Corp. 14,405,400
231,900 Input/Output, Inc. (a) 3,246,600
173,000 J. Ray McDermott, S.A. (a) 2,962,625
200,000 McDermott International, Inc. 3,700,000
153,600 Noble Affiliates, Inc. 5,491,200
87,500 Parker & Parsley Petroleum Co. 2,887,500
55,000 Schlumberger, Ltd. 6,091,250
187,200 Smith International, Inc. (a) 8,868,600
48,400 Texaco, Inc. 5,106,200
122,400 The Williams Companies, Inc. 5,370,300
134,700 Weatherford Enterra, Inc. (a) 4,276,725
235,400 YPF Sociedad Anonima (ADR)
(Argentina) $ 6,502,925
------------
99,693,275
- ---------------------------------------------------------------
Financial Services Sector--15.6%
89,900 Advanta Corp. 2,000,275
26,000 American International Group, Inc. 3,341,000
62,500 Chase Manhattan Corp. 5,789,063
70,000(b) Citicorp 7,883,750
151,000 Crescent Real Estate Equities,
Inc. 3,963,750
123,000 Developers Diversified Reality
Corp. 4,535,625
213,500(b) Federal National Mortgage
Association 8,780,187
130,800 Manufactured Home Communities,
Inc. 2,746,800
37,700 Meditrust Corp. 1,376,050
80,100 ReliaStar Financial Corp. 4,846,050
49,200 Student Loan Marketing Association 5,817,900
319,000 The Money Store, Inc. 6,898,375
126,066 Travelers Group, Inc. 6,980,905
------------
64,959,730
- ---------------------------------------------------------------
Health Care Sector--13.4%
128,200(b) Aetna, Inc. 11,682,225
226,050 Columbia/HCA Healthcare Corp. 7,911,750
33,600 Johnson & Johnson Co. 2,058,000
247,000 Novartis AG (ADR) (Switzerland) 16,302,000
75,000 Pfizer, Inc. 7,200,000
226,900 Pharmacia & Upjohn, Inc. 6,721,912
177,600 Premier Research Worldwide, LTD.
(a) 1,709,400
78,000 Sierra Health Services, Inc. (a) 2,008,500
------------
55,593,787
- ---------------------------------------------------------------
Leisure Sector--5.8%
191,200 Carnival Corp. - Class A 7,050,500
214,700 Hilton Hotels Corp. 5,796,900
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
Portfolio of Investments as
of April 30, 1997 PRUDENTIAL MULTI-SECTOR FUND, INC.
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
Leisure Sector (cont'd.)
267,800 La Quinta Inns, Inc. $ 5,858,125
220,600 Patriot American Hospitality, Inc. 4,742,900
52,900 Prime Hospitality Corp. (a) 879,462
------------
24,327,887
- ---------------------------------------------------------------
Precious Metals Sector--2.5%
244,700 UCAR International, Inc. (a) 10,277,400
- ---------------------------------------------------------------
Retailing Sector--9.8%
124,900 American Stores Co. 5,682,950
88,000 CVS Corp. 4,367,000
287,000(b) Gap, Inc. 9,148,125
738,000 Kmart Corp. (a) 10,055,250
92,100 Quality Food Centers, Inc. (a) 3,695,512
68,300 Sears Roebuck & Co. 3,278,400
157,000 Toys 'R' Us, Inc. (a) 4,474,500
------------
40,701,737
- ---------------------------------------------------------------
Technology Sector--19.2%
261,075 ADC Telecommunications, Inc. (a) 6,820,584
322,200 BDM International, Inc. (a) 7,491,150
3,000 C-NET Inc. (a) 60,750
83,500 Cisco Systems, Inc. (a) 4,321,125
200,000 Cognizant Corp. 6,525,000
101,500(b) Computer Associates International,
Inc. 5,278,000
121,600 Comverse Technology, Inc. (a) 4,772,800
113,300 Edify Corp. (a) 1,232,138
141,600 Harman International Industries,
Inc. 5,416,200
59,600 Intel Corp. 9,126,250
245,500 Larscom, Inc. (a) 1,526,703
74,000 Microsoft Corp. (a) 8,991,000
32,700 SGS-Thomson Microelectronics N.V.
(a) 2,562,863
301,400 Uniphase Corp. (a) 11,980,650
231,550 Westell Technologies, Inc. (a) 3,994,237
------------
80,099,450
------------
Total common stocks
(cost $355,594,570) 403,205,892
------------
Principal
Amount
(000) Description Value (Note 1)
- ---------------------------------------------------------------
CONVERTIBLE BONDS--0.3%
- ---------------------------------------------------------------
Technology Sector--0.3%
$1,579 The Learning Co., Inc.
5.50%, 11/1/00
(cost $1,351,464) $ 1,132,933
------------
Total long-term investments
(cost $356,946,034) 404,338,825
------------
SHORT-TERM INVESTMENTS--4.8%
REPURCHASE AGREEMENT
- ---------------------------------------------------------------
19,879 Joint Repurchase Agreement Account
5.42%, 5/1/97, (Note 5)
(cost $19,879,000) 19,879,000
------------
Total investments before
short sales--101.9%
(cost $376,825,034; Note 4) 424,217,825
------------
Shares
- --------
COMMON STOCK SOLD SHORT(a)--(2.0%)
- ---------------------------------------------------------------
Restaurants Sector--(1.6%)
175,000 Cracker Barrel Old Country Store,
Inc. (4,681,250)
109,300 Planet Hollywood International,
Inc. (2,008,388)
------------
(6,689,638)
- ---------------------------------------------------------------
Education Sector--(0.4%)
50,000 Apollo Group, Inc. (1,343,750)
------------
Total common stocks sold short
(proceeds $7,871,565) (8,033,388)
------------
Total investments, net of short sales--99.9% 416,184,437
Other assets in excess of
liabilities--0.1% 307,284
------------
Net Assets--100% $416,491,721
============
- ---------------
(a) Non-income producing security.
(b) Pledged as collateral on short sale.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
4
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1997
<S> <C>
Investments, at value (cost $376,825,034)........................................................ $424,217,825
Cash............................................................................................. 14,204
Receivable for investments sold.................................................................. 6,609,903
Deposits with broker for securities sold short................................................... 2,825,213
Dividends and interest receivable................................................................ 705,084
Receivable for Fund shares sold.................................................................. 312,684
Forward currency contracts--net amount receivable from counterparties............................ 247,041
Other assets..................................................................................... 8,187
--------------
Total assets.................................................................................. 434,940,141
--------------
Liabilities
Payable for investments purchased................................................................ 8,403,228
Investments sold short, at value (proceeds $7,871,565)........................................... 8,033,388
Payable for Fund shares reacquired............................................................... 966,600
Accrued expenses................................................................................. 469,427
Management fee payable........................................................................... 210,069
Distribution fee payable......................................................................... 199,241
Forward currency contracts--net amount payable to counterparties................................. 166,467
--------------
Total liabilities............................................................................. 18,448,420
--------------
Net Assets....................................................................................... $416,491,721
==============
Net assets were comprised of:
Common stock, at par.......................................................................... $ 31,305
Paid-in capital in excess of par.............................................................. 352,165,003
--------------
352,196,308
Undistributed net investment income........................................................... 773,019
Accumulated net realized capital and currency gains........................................... 16,210,852
Net unrealized appreciation on investments and foreign currencies............................. 47,311,542
--------------
Net assets, April 30, 1997....................................................................... $416,491,721
==============
Class A:
Net asset value and redemption price per share
($203,196,502 / 15,079,268 shares of common stock issued and outstanding).................. $13.48
Maximum sales charge (5% of offering price)................................................... 0.71
--------------
Maximum offering price to public.............................................................. $14.19
==============
Class B:
Net asset value, offering price and redemption price per share
($191,598,878 / 14,609,250 shares of common stock issued and outstanding).................. $13.11
==============
Class C:
Net asset value, offering price and redemption price per share
($4,298,251 / 327,760 shares of common stock issued and outstanding)....................... $13.11
==============
Class Z:
Net asset value, offering price and redemption price per share
($17,398,090 / 1,288,814 shares of common stock issued and outstanding).................... $13.50
==============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
5
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Operations
- ------------------------------------------------------------
Year Ended
Net Investment Income April 30, 1997
--------------
Income
Dividends (net of foreign withholding taxes
of $37,478)............................. $ 5,346,239
Interest................................... 2,316,393
--------------
Total income............................ 7,662,632
--------------
Expenses
Management fee............................. 2,841,669
Distribution fee--Class A.................. 528,760
Distribution fee--Class B.................. 2,192,493
Distribution fee--Class C.................. 47,081
Transfer agent's fees and expenses......... 855,000
Reports to shareholders.................... 299,000
Custodian's fees and expenses.............. 220,000
Registration fees.......................... 90,000
Legal fees and expenses.................... 40,000
Audit fee and expenses..................... 38,000
Directors' fees and expenses............... 31,250
Miscellaneous.............................. 24,028
--------------
Total expenses.......................... 7,207,281
--------------
Net investment income......................... 455,351
--------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain (loss) on:
Investment transactions.................... 46,396,562
Foreign currency transactions.............. 870,241
Short sale transactions.................... (4,748,882)
--------------
42,517,921
--------------
Net change in unrealized appreciation
(depreciation) on:
Investments................................ (20,382,004)
Foreign currencies......................... 125,510
Short sales................................ (522,893)
--------------
(20,779,387)
--------------
Net gain on investments and foreign currency
transactions............................... 21,738,534
--------------
Net Increase in Net Assets
Resulting from Operations..................... $ 22,193,885
==============
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
Increase (Decrease) Year Ended April 30,
------------------------------
in Net Assets 1997 1996
-------------- ------------
Operations
Net investment income.......... $ 455,351 $ 433,736
Net realized gain on
investments and foreign
currencies.................. 42,517,921 61,581,024
Net change in unrealized
appreciation (depreciation)
of investments.............. (20,779,387) 54,111,793
-------------- ------------
Net increase in net assets
resulting from operations... 22,193,885 116,126,553
-------------- ------------
Net equalization credits.......... -- 443,875
-------------- ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (400,225) (219,972)
Class B..................... -- (209,135)
Class C..................... -- (4,629)
Class Z..................... (55,126) --
-------------- ------------
(455,351) (433,736)
-------------- ------------
Distributions in excess of net
investment income
Class A..................... (566,340) (1,134)
Class B..................... (620,254) (1,078)
Class C..................... (12,405) (24)
Class Z..................... (50,726) --
-------------- ------------
(1,249,725) (2,236)
-------------- ------------
Distributions from net capital
gains
Class A..................... (23,717,108) (18,374,785)
Class B..................... (25,810,921) (26,052,498)
Class C..................... (537,914) (586,778)
Class Z..................... (2,170,377) --
-------------- ------------
(52,236,320) (45,014,061)
-------------- ------------
Fund share transactions (net of
share conversion) (Note 6)
Net proceeds from Fund shares
subscribed.................. 116,532,381 299,516,817
Net asset value of Fund shares
issued in reinvestment of
dividends and
distributions............... 50,651,007 42,592,536
Cost of shares reacquired...... (196,343,364) (200,926,665)
-------------- ------------
Net increase (decrease) in net
assets from Fund share
transactions................ (29,159,976) 141,182,688
-------------- ------------
Total increase (decrease)......... (60,907,487) 212,303,083
Net Assets
Beginning of year................. 477,399,208 265,096,125
-------------- ------------
End of year....................... $ 416,491,721 $477,399,208
============== ============
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
6
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
Prudential Multi-Sector Fund, Inc. (the 'Fund'), is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund was incorporated in Maryland on February 21, 1990 and had no
operations until May 11, 1990 when 4,398 shares each of Class A and Class B
common stock were sold for $100,000 to Prudential Investments Fund Management
LLC ('PIFM'). Investment operations commenced June 29, 1990. The Fund's
investment objective is long-term growth of capital by primarily investing in
equity securities of companies in various economic sectors.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments, including options and securities sold short,
traded on a national securities exchange and NASDAQ national market equity
securities are valued at the last reported sales price on the primary exchange
on which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges whose primary market is believed to be
over-the-counter) and listed securities for which no sales were reported on that
date are valued at the mean between the last reported bid and asked prices.
Stock options traded on national securities exchanges are valued at the closing
prices on such exchanges. 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 Fund's Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults, and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at year end. Similarly, the Fund does not isolate the
effect of changes in foreign exchange rates from the fluctuations arising from
changes in the market prices of long-term portfolio securities sold during the
fiscal year. Accordingly, such realized foreign currency gains (losses) are
included in the reported net realized gains (losses) on investment transactions.
Net realized gain on foreign currency transactions of $870,241 represents net
foreign exchange gains from sales and maturities of short-term securities,
holding of foreign currencies, currency gains or losses realized between the
trade and settlement dates of security transactions, and the difference between
the amounts of dividends, interest and foreign taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
currency gains and losses from valuing foreign currency denominated assets and
liabilities at year end exchange rates are reflected as a component of net
unrealized appreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
- --------------------------------------------------------------------------------
7
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale. The proceeds received from
the short sale are maintained 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Net
investment income, other than distribution fees, and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Expenses are recorded on the accrual basis which may require the use of certain
estimates by management.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from options. The difference between the premium and the
amount paid on effecting a closing purchase transaction, including brokerage
commissions, is also treated as a realized gain, or if the premium received is
less than the amount paid for the closing purchase transaction, as a realized
loss. If a call option is exercised, the premium is added to the proceeds from
the sale of the underlying security or currency in determining whether the Fund
has realized a gain or loss. If a put option is exercised, the premium reduces
the cost basis of the securities or currencies purchased by the Fund. The Fund,
as writer of an option may have no control over whether the underlying
securities may be sold (call) or purchased (put) and, as a result, bears the
market risk of an unfavorable change in the price of the security or currency
underlying the written option.
Equalization: Effective May 1, 1996, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The balance of $466,054 of undistributed net investment income at
October 31, 1996, resulting from equalization was transferred to paid-in capital
in excess of par. Such reclassification has no effect on net assets, results of
operations, or net asset value per share.
Dividends and Distributions: Dividends from net investment income are declared
and paid semi-annually. The Fund will distribute net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the A.I.C.P.A.'s 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 fiscal year ended April 30, 1997, the Fund reclassified
$642,873 of foreign currency gains which were recognized for tax purposes in the
current and prior fiscal years by increasing undistributed net investment income
and decreasing accumulated net realized capital and currency gains. Net
investment income, net realized gains, and net assets were not affected by this
change.
Taxes: It is the Fund's policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'). PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the cost of the subadviser's services, the compensation of officers of
the Fund, occupancy
- --------------------------------------------------------------------------------
8
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .65 of 1% of the Fund's average daily net assets. For the fiscal year
ended April 30, 1997, the manager agreed to limit its management fee to no more
than .625 of 1% of the first $500 million of the average daily net assets of the
Fund, .55 of 1% of the next $500 million of average daily net assets and .50 of
1% of the Fund's average daily net assets in excess of $1 billion.
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.
Such expenses under the Plans were .25 of 1% of the average daily net assets of
Class A shares and 1% of the average daily net assets of both the Class B and C
shares for the year ended April 30, 1997.
PSI has advised the Fund that they have received approximately $80,500 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended April 30 1997. From these fees, PSI paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Fund that for the fiscal year ended April 30, 1997, it
received approximately $470,300 and $3,400 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC 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
$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 an an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of April 30,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused 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 fiscal year ended April 30,
1997, the Fund incurred fees of approximately $832,900 for the services of PMFS.
As of April 30, 1997, approximately $71,900 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 fiscal year ended April 30, 1997, PSI earned approximately $87,900 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 fiscal year ended April 30, 1997 were $413,306,164 and $486,324,247,
respectively.
The cost basis of investments for federal income tax purposes at April 30, 1997
was $376,836,551 and, accordingly, net unrealized appreciation of investments
for federal income tax purposes was $47,381,274 (gross unrealized
appreciation--$68,478,387, gross unrealized depreciation--$21,097,113).
At April 30, 1997, the Fund had outstanding forward currency contracts to
purchase and sell foreign currency as follows:
Value at
Foreign Currency Settlement Date Current
Purchase Contracts Payable Value Depreciation
- ---------------------- ---------------- ---------- ------------
Japanese Yen,
expiring 5/6/97 $4,100,377 $3,933,910 $ (166,467)
========== ========== ===========
Value at
Foreign Currency Settlement Date Current
Sale Contracts Receivable Value Appreciation
- --------------------- ---------------- ---------- -------------
Japanese Yen,
expiring 5/6/97 $4,180,951 $3,933,910 $ 247,041
========== ========== ===========
- --------------------------------------------------------------------------------
9
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of April 30, 1997, the Fund
had a 2.45% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $19,879,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
value of the collateral therefore were as follows:
CS Boston Corp., 5.50% dated 4/30/97, in the principal amount of $208,000,000,
repurchase price $208,031,778, due 5/1/97. The value of the collateral including
accrued interest is $214,501,123.
J.P. Morgan Securities, 5.42% dated 4/30/97 in the principal amount of
$208,000,000, repurchase price $208,031,316, due 5/1/97. The value of the
collateral including accrued interest is $212,160,231.
SBC Warburg, 5.30% dated 4/30/97 in the principal amount of $144,000,000,
repurchase price $144,021,200, due 5/1/97. The value of the collateral including
accrued interest is $146,969,072.
Smith Barney, Inc., 5.25% and 5.44%, both dated 4/30/97 in the principal amount
of $43,121,000 and $208,000,000 respectively, repurchase price $43,127,288 and
$208,031,431 respectively, both due 5/1/97. The value of the combined collateral
including accrued interest is $256,144,337.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares 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 qualify to purchase Class A shares at net asset value. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has authorized 2 billion shares of common stock, $.001 par value per
share, equally divided into four classes, designated Class A, B, C and Class Z
common stock.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ------- ---------------- -------------
Year ended April 30, 1997:
Shares sold................... 6,197,250 $ 86,386,710
Shares issued in reinvestment
of
dividends and
distributions............... 1,685,407 23,239,649
Shares reacquired............. (8,634,608) (120,199,576)
---------------- -------------
Net decrease in shares
outstanding before
conversion.................. (751,951) (10,573,217)
Shares issued upon conversion
from Class B................ 1,116,749 15,549,557
---------------- -------------
Net increase in shares
outstanding................. 364,798 $ 4,976,340
================ =============
Year ended April 30, 1996:
Shares sold................... 6,462,195 $ 62,191,760
Shares issued in connection
with
acquisition of Prudential
Strategist Fund............. 10,275,056 140,334,823
Shares issued in reinvestment
of
dividends and
distributions............... 1,318,660 17,532,326
Shares reacquired............. (9,677,912) (133,825,643)
---------------- -------------
Net increase in shares
outstanding before
conversion.................. 8,377,999 86,233,266
Shares issued upon conversion
from Class B................ 683,336 9,391,724
---------------- -------------
Net increase in shares
outstanding................. 9,061,335 $ 95,624,990
================ =============
Class B
- -------
Year ended April 30, 1997:
Shares sold................... 1,236,387 $ 16,762,196
Shares issued in reinvestment
of
dividends and
distributions............... 1,823,196 24,608,185
Shares reacquired............. (4,273,687) (57,627,667)
---------------- -------------
Net decrease in shares
outstanding before
conversion.................. (1,214,104) (16,257,286)
Shares reacquired upon
conversion
from Class A................ (1,142,516) (15,549,557)
---------------- -------------
Net decrease in shares
outstanding................. (2,356,620) $ (31,806,843)
================ =============
Year ended April 30, 1996:
Shares sold................... 3,389,483 $ 30,825,970
Shares issued in connection
with
acquisition of Prudential
Strategist Fund............. 3,011,418 40,656,859
Shares issued in reinvestment
of
dividends and
distributions............... 1,853,593 24,491,053
Shares reacquired............. (4,546,535) (62,190,799)
---------------- -------------
Net increase in shares
outstanding before
conversion.................. 3,707,959 33,783,083
Shares reacquired upon
conversion
from Class A................ (693,976) (9,391,724)
---------------- -------------
Net increase in shares
outstanding................. 3,013,983 $ 24,391,359
================ =============
- --------------------------------------------------------------------------------
10
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
Class C Shares Amount
- ------- ---------------- -------------
Year ended April 30, 1997:
Shares sold................... 63,373 $ 852,741
Shares issued in reinvestment
of
dividends and
distributions............... 39,044 526,955
Shares reacquired............. (137,317) (1,878,420)
---------------- -------------
Net decrease in shares
outstanding................. (34,900) $ (498,724)
================ =============
Year ended April 30, 1996:
Shares sold................... 196,902 $ 2,694,195
Shares issued in connection
with
acquisition of Prudential
Strategist Fund............. 5,166 69,751
Shares issued in reinvestment
of
dividends and
distributions............... 43,092 569,157
Shares reacquired............. (152,356) (2,060,271)
---------------- -------------
Net increase in shares
outstanding................. 92,804 $ 1,272,832
================ =============
Class Z
- -------
Year ended April 30, 1997:
Shares sold................... 897,823 $ 12,530,734
Shares issued in reinvestment
of
distributions............... 165,237 2,276,218
Shares reacquired............. (1,204,635) (16,637,701)
---------------- -------------
Net decrease in shares
outstanding................. (141,575) $ (1,830,749)
================ =============
March 1, 1996* through
April 30, 1996:
Shares sold................... 1,634,755 $ 22,743,459
Shares reacquired............. (204,366) (2,849,952)
---------------- -------------
Net increase in shares
outstanding................. 1,430,389 $ 19,893,507
================ =============
- ---------------
* Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 7. Distributions
On June 24, 1997 the Board of Directors of the Fund declared a distribution from
net capital and currency gains to Class A, B, C and Z shareholders of $0.565 per
share, payable on June 27, 1997 to shareholders of record on June 24, 1997.
- --------------------------------------------------------------------------------
11
<PAGE>
Financial Highlights PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------
Years Ended April 30,
---------------------------------------------------------
1997 1996 1995(a) 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 14.40 $ 13.45 $ 13.21 $ 13.19 $ 12.51
-------- -------- ------- ------- -------
Income from investment operations:
Net investment income......................... .06 .09 .09 .18 .30
Net realized and unrealized gain on
investments and foreign currency
transactions............................... .70 2.52 1.44 1.64 1.47
-------- -------- ------- ------- -------
Total from investment operations........... .76 2.61 1.53 1.82 1.77
-------- -------- ------- ------- -------
Less distributions:
Dividends from net investment income.......... (.03) (.04) -- (.21) (.30)
Distributions in excess of net investment
income..................................... (.04) -- -- -- --
Distributions from net capital and currency
gains...................................... (1.61) (1.62) (1.29) (1.59) (.79)
-------- -------- ------- ------- -------
Total distributions........................ (1.68) (1.66) (1.29) (1.80) (1.09)
-------- -------- ------- ------- -------
Net asset value, end of year.................. $ 13.48 $ 14.40 $ 13.45 $ 13.21 $ 13.19
======== ======== ======= ======= =======
TOTAL RETURN(b):.............................. 5.24% 20.69% 12.15% 14.16% 15.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $203,197 $211,920 $76,035 $53,237 $43,390
Average net assets (000)...................... $211,504 $201,315 $59,316 $49,840 $46,890
Ratios to average net assets:
Expenses, including distribution fees...... 1.23% 1.23% 1.44% 1.30% 1.28%
Expenses, excluding distribution fees...... .98% .98% 1.19% 1.08% 1.08%
Net investment income...................... .48% .47% .68% 1.15% 2.44%
For Class A, B, C and Z shares:
Portfolio turnover............................ 99% 136% 122% 110% 209%
Average commission rate paid per share........ $ .0572 $ .0537 N/A N/A N/A
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
12
<PAGE>
Financial Highlights PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------
Years Ended April 30,
-----------------------------------------------------------
1997 1996 1995(a) 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 14.13 $ 13.29 $ 13.16 $ 13.15 $ 12.47
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income (loss).................. (.05) .02 (.01) .07 .19
Net realized and unrealized gain on
investments and foreign currency
transactions............................... .68 2.45 1.43 1.63 1.47
-------- -------- -------- -------- -------
Total from investment operations........... .63 2.47 1.42 1.70 1.66
-------- -------- -------- -------- -------
Less distributions:
Dividends from net investment income.......... -- (.01) -- (.10) (.19)
Distributions in excess of net investment
income..................................... (.04) -- -- -- --
Distributions from net capital and currency
gains...................................... (1.61) (1.62) (1.29) (1.59) (.79)
-------- -------- -------- -------- -------
Total distributions........................ (1.65) (1.63) (1.29) (1.69) (.98)
-------- -------- -------- -------- -------
Net asset value, end of year.................. $ 13.11 $ 14.13 $ 13.29 $ 13.16 $ 13.15
======== ======== ======= ======= =======
TOTAL RETURN(b):.............................. 4.43% 19.84% 11.31% 13.22% 14.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $191,599 $239,739 $185,474 $128,098 $92,921
Average net assets (000)...................... $219,249 $236,580 $153,209 $108,981 $99,072
Ratios to average net assets:
Expenses, including distribution fees...... 1.98% 1.98% 2.19% 2.08% 2.08%
Expenses, excluding distribution fees...... .98% .98% 1.19% 1.08% 1.08%
Net investment income (loss)............... (.28)% (.22)% (.07)% .35% 1.64%
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
13
<PAGE>
Financial Highlights PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
------------------------------- --------------------------
August 1, March 1,
Years Ended April 1994(d) 1996(e)
30, Through Year Ended Through
----------------- April 30, April 30, April 30,
1997 1996 1995(a) 1997 1996
------ ------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $14.13 $13.29 $ 13.74 $ 14.41 $ 13.91
------ ------ --------- ----------- ----------
Income from investment operations:
Net investment income (loss).................. (.04) .03 -- .11 .01
Net realized and unrealized gain on
investments and foreign currency
transactions............................... .67 2.44 .84 .67 .49
------ ------ --------- ----------- ----------
Total from investment operations........... .63 2.47 .84 .78 .50
------ ------ --------- ----------- ----------
Less distributions:
Dividends from net investment income.......... -- (.01) -- (.04) --
Distributions in excess of net investment
income..................................... (.04) -- -- (.04) --
Distributions from net capital and currency
gains...................................... (1.61) (1.62) (1.29) (1.61) --
------ ------ --------- ----------- ----------
Total distributions........................ (1.65) (1.63) (1.29) (1.69) --
------ ------ --------- ----------- ----------
Net asset value, end of year.................. $13.11 $14.13 $ 13.29 $ 13.50 $ 14.41
====== ====== ========= =========== ==========
TOTAL RETURN(b):.............................. 4.43% 19.84% 6.62% 5.48% 3.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $4,298 $5,125 $ 3,587 $17,398 $ 20,616
Average net assets (000)...................... $4,708 $5,056 $ 1,653 $19,206 $ 20,298
Ratios to average net assets:
Expenses, including distribution fees...... 1.98% 1.98% 2.37%(c) .98% .98%(c)
Expenses, excluding distribution fees...... .98% .98% 1.37%(c) .98% .98%(c)
Net investment income (loss)............... (.27)% (.21)% .03%(c) .74% .54%(c)
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
14
<PAGE>
Report of Independent Accountants PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Prudential Multi-Sector Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Multi-Sector Fund, Inc.
(the 'Fund') at April 30, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at April 30, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provides
a reasonable basis for the opinion expressed above. The accompanying statement
of changes in net assets for the year ended April 30, 1996 and financial
highlights for each of the four years in the period ended April 30, 1996 were
audited by other independent accountants, whose opinion dated June 13, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
June 24, 1997
Tax Information (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (April 30, 1997) as to the federal income tax status of
dividends paid by the Fund during such fiscal year. Accordingly, we are advising
you that during its fiscal year ended April 30, 1997, the Fund paid
distributions for Class A shares totaling $1.673 per share, comprised of $0.463
per share ordinary income, short-term capital gains and currency gains which are
taxable as ordinary income and $1.210 per share long-term capital gains which is
taxable as such. The Fund paid distributions for Class B and C shares totaling
$1.645 per share, comprised of $0.435 per share short-term capital gains and
currency gains which are taxable as ordinary income and $1.21 per share
long-term capital gains which is taxable as such. The Fund paid distributions
for Class Z shares totaling $1.685 per share, comprised of $0.475 per share
ordinary income, short-term capital gains and currency gains which are taxable
as ordinary income and $1.21 per share long-term capital gains which is taxable
as such. Further, we wish to advise you that 17.67% of the ordinary income
dividends paid in the fiscal year ended April 30, 1997 qualified for the
corporate dividends received deduction available to corporate taxpayers.
In January 1998, you will be advised on IRS Form 1099 DIV or substitute Form
1099, as to the federal tax status of the distributions received by you in
calendar 1997. The amounts that will be reported on such Form 1099 DIV will be
the amounts to use on your 1997 federal income tax return and will differ from
the amounts which we must report for the Fund's fiscal year ended April 30,
1997.
We are required by Massachusetts, Missouri and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders. Please be advised that 4.40% of the dividends paid by
the Fund qualify for each of these states' tax exclusion.
- --------------------------------------------------------------------------------
15
<PAGE>
Change of Accountants PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
independent accountants. For the years ended April 30, 1991 through April 30,
1996, Deloitte & Touche LLP expressed an unqualified opinion on the Fund's
financial statements. There were no disagreements between Fund management and
Deloitte & Touche LLP prior to their termination. The Board of Directors
approved the termination of Deloitte & Touche LLP and the appointment of Price
Waterhouse LLP as the Fund's independent accountants.
- --------------------------------------------------------------------------------
16
<PAGE>
Supplemental Proxy Information PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
The Annual Meeting of Shareholders of the Prudential Multi-Sector Fund, Inc.
was held on October 30, 1996 at the offices of Prudential Securities
Incorporated, One Seaport Plaza, New York, New York. The meeting was held for
the following purposes:
(1) To elect the following twelve Directors: Edward D. Beach,
Delayne Dedrick Gold, Robert F. Gunia, Donald D. Lennox,
Douglas H. McCorkindale, Mendel A. Melzer, Thomas T. Mooney,
Stephen P. Munn, Richard A. Redeker, Robin B. Smith, Louis A.
Weil, III, Clay T. Whitehead.
(2c) To amend the Fund's investment restrictions to allow loans of
portfolio securities up to 30% of the Fund's total assets.
(3) To ratify the selection of Deloitte & Touche LLP as independent
accountants for the fiscal year ending April 30, 1998.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Directors/Auditor Votes for Votes against Votes withheld/Abstentions
------------------------ ------------ -------------- ---------------------------
<S> <C> <C> <C>
(1) Edward D. Beach 16,461,433 -- 617,014
Delayne Dedrick Gold 16,494,098 -- 584,349
Robert F. Gunia 16,507,958 -- 570,489
Donald D. Lennox 16,474,830 -- 603,617
Douglas H. McCorkindale 16,484,838 -- 593,609
Mendel A. Melzer 16,479,820 -- 598,627
Thomas T. Mooney 16,498,123 -- 580,324
Stephen P. Munn 16,503,462 -- 574,985
Richard A. Redeker 16,503,345 -- 575,102
Robin B. Smith 16,493,592 -- 584,855
Louis A. Weil, III 16,501,037 -- 577,410
Clay T. Whitehead 16,489,715 -- 588,732
(2c) Investment restrictions 11,518,101 826,828 800,376
(3) Deloitte & Touche LLP 16,171,506 255,437 651,504
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
================================================================================
Getting The Most From Your Prudential Mutual Fund.
- --------------------------------------------------------------------------------
Some mutual fund shareholders won't ever read this -- they don't read annual and
semi-annual reports. It's quite understandable. These annual and semi-annual
reports are prepared to comply with Federal regulations. They are often written
in language that is difficult to understand. So when most people run into those
particularly daunting sections of these reports, they don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our report to make it
easier to understand and more pleasant to read, in hopes you'll find it
profitable to spend a few minutes familiarizing yourself with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's primary concern, we
present performance information in two different formats. You'll find it first
on the "At A Glance" page where we compare the Fund and the comparable average
calculated by Lipper Analytical Services, a nationally recognized mutual fund
rating agency. We report both the cumulative total returns and the average
annual total returns. The cumulative total return is the total amount of income
and appreciation the Fund has achieved in various time periods. The average
annual total return is an annualized representation of the Fund's performance --
it generally smoothes out returns and gives you an idea how much the Fund has
earned in an average year, for a given time period. Under the performance box,
you'll see legends that explain the performance information, whether fees and
sales charges have been included in returns, and the inception dates for the
Fund's share classes.
See the performance comparison charts at the back of the report for more
performance information. And keep in mind that past perfor-mance is not
indicative of future results.
Portfolio Manager's Report
The portfolio manager who invests your money for you reports on successful --
and not-so-successful -- strategies in this section of your report. Look for
recent purchases and sales here, as well as information about the sectors the
portfolio manager favors and any changes that are on the drawing board.
Portfolio Of Investments
This is where the report begins to look technical, but it's really just a
listing of each security held at the end of the reporting period, along with
valuations and other information. Please note that sometimes we discuss a
security in the Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.
<PAGE>
Statement Of Assets And Liabilities
The balance sheet shows the assets (the value of the Fund's holdings),
liabilities (how much the Fund owes) and net assets (the Fund's equity, or
holdings after the Fund pays its debts) as of the end of the reporting period.
It also shows how we calculate the net asset value per share for each class of
shares. The net asset value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the money or new shares are being
paid or issued to you. The net asset value fluctuates daily along with the value
of every security in the portfolio.
Statement Of Operations
This is the income statement, which details income (mostly interest and
dividends earned) and expenses (including what you pay us to manage your money).
You'll also see capital gains here -- both realized and unrealized.
Statement Of Changes In Net Assets
This schedule shows how income and expenses translate into changes in net
assets. The Fund is required to pay out the bulk of its income to shareholders
every year, and this statement shows you how we do it -- through dividends and
distributions -- and how that affects the net assets. This statement also shows
how money from investors flowed into and out of the Fund.
Notes To Financial Statements
This is the kind of technical material that can intimidate readers, but it does
contain useful information. The Notes provide a brief history and explanation of
your Fund's objectives. In addition, they also outline how Prudential Mutual
Funds prices securities. The Notes also explain who manages and distributes the
Fund's shares, and more importantly, how much they are paid for doing so.
Finally, the Notes explain how many shares are outstanding and the number issued
and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages, but on a per share
basis. It is designed to help you understand how the Fund performed and to
compare this year's performance and expenses to those of prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and certifies that the
information is fairly presented and complies with generally accepted accounting
principles.
Tax Information
This is information which we report annually about how much of your total return
is taxable. Should you have any questions, you may want to consult a tax
advisor.
Performance Comparison
These charts are included in the annual report and are required by the
Securities Exchange Commission. Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception or for 10 years (whichever is
shorter). To help you put that return in context, we are required to include the
performance of an unmanaged, broad based securities index, as well. The index
does not reflect the cost of buying the securities it contains or the cost of
managing a mutual fund. Of course, the index holdings do not mirror those of the
fund -- the index is a broadly based reference point commonly used by investors
to measure how well they are doing. A definition of the selected index is also
provided. Investors generally cannot invest directly in an index.
<PAGE>
================================================================================
Getting The Most From Your Prudential Mutual Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Change Your Mind.
You can exchange your shares in most Prudential Mutual Funds for shares in most
other Prudential Mutual Funds, without charges. This may be most helpful if your
investment needs change.
- --------------------------------------------------------------------------------
Reinvest Dividends Free Of Charge.
Reinvest your dividends and/or capital gains distributions automatically --
without charge.
- --------------------------------------------------------------------------------
Invest For Retirement.
There is no minimum investment for an IRA. Plus, you defer taxes on your
investment earnings by investing in an IRA.
If you'd like, you can contribute up to $2,000 a year in an IRA. If you are
married, you and your spouse (if not working outside the home) can contribute up
to $2,250 a year. (Withdrawals are taxed as ordinary income and may be subject
to a 10% penalty prior to age 59 1/2.)
- --------------------------------------------------------------------------------
Change Your Job.
You can take your pension with you. Use a rollover IRA to manage your
company-sponsored retirement plan while retaining the special tax-deferred
advantages.
- --------------------------------------------------------------------------------
Invest In Your Children.
There's no fee to open a custodial account for a child's education or other
needs.
- --------------------------------------------------------------------------------
Take Income.
Would you like to receive monthly or quarterly checks in any amount from
your fund account? Just let us know. We'll take care of it. Of course, there are
minimum amounts. And shares redeemed may be subject to tax, and Class B and C
shares may be subject to contingent deferred sales charges. We'll gladly answer
your questions.
- --------------------------------------------------------------------------------
Keep Informed.
We want to keep you up-to-date. Of course, you receive account activity
statements every quarter. But you also receive annual and semi-annual fund
reports, as well as other important updates on events that affect your
investments, including tax information.
This material is only authorized for distribution when preceded or accompanied
by a current prospectus. Read the prospectus carefully before you invest or send
money.
<PAGE>
Comparing A $10,000 Investment.
- -----------------------------------
Prudential Multi-Sector Fund, Inc.
vs. the S&P 500 Index.
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than their original cost. The box on top of the graphs (where
applicable) are designed to give you an idea how much the Fund's returns can
fluctuate from year to year by measuring the best and worst calendar years in
terms of total annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Multi-Sector Fund (Class A, Class
B, Class C and Class Z) with a similar investment in the S&P 500 Index by
portraying the initial account values at the commencement of operations of each
class, and subsequent account values at the end of this reporting period (April
30), as measured on a quarterly basis, beginning in 1990 for Class A and B
shares; in 1994 for Class C shares and in 1996 for Class Z shares. For purposes
of the graphs, and unless otherwise indicated, in the accompanying tables it has
been assumed (a) that the maximum applicable front-end sales charge was deducted
from the initial $10,000 investment in Class A shares; (b) the maximum
applicable contingent deferred sales charge was deducted from the value of the
investment in Class B and Class C shares, assuming full redemption on April 30,
1997; (c) all recurring fees (including management fees) were deducted; and (d)
all dividends and distributions were reinvested. Class Z shares do not have a
sales charge or a distribution fee. Class B shares will automatically convert to
Class A shares, on a quarterly basis, beginning approximately seven years after
purchase. This conversion feature is not reflected in the graph.
The S&P 500 is a capital-weighted index, representing the aggregate market value
of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the reinvestment of all
dividends, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Fund. The securities in the S&P 500
may differ substantially from the securities in the Fund. The S&P 500 is not the
only index that may be used to characterize performance of stock funds and other
indexes may portray different comparative performance. Investors cannot directly
invest in an index.
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class A
=======
---------------------
Best Year: 1991 27.6%
Worst Year: 1992 2.1%
---------------------
6/29/90 4/30/97
------- -------
<S> <C> <C>
Prudential Multi-Sector Fund, Inc. $10,000 $20,565
S&P 500 Index. $10,000 $26,877
</TABLE>
Average Annual Total
Returns - Class A
-------------------------
With Sales Load
11.1% Since Inception
12.2% for 5 Years
0.0% for 1 Year
Without Sales Load
12.0% Since Inception
13.4% for 5 Years
5.2% for 1 Year
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class B
=======
----------------------
Best Year: 1991 26.7%
Worst Year: 1992 1.2%
----------------------
6/29/90 4/30/97
------- -------
<S> <C> <C>
Prudential Multi-Sector Fund, Inc. $10,000 $20,530
S&P 500 Index. $10,000 $26,877
</TABLE>
Average Annual Total
Returns - Class B
-------------------------
With Sales Load
11.1% Since Inception
12.4% for 5 Years
(0.6)% for 1 Year
Without Sales Load
11.1% Since Inception
12.5% for 5 Years
4.4% for 1 Year
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class C
=======
8/1/94 4/30/97
------ -------
<S> <C> <C>
Prudential Multi-Sector Fund, Inc. $10,000 $13,342
S&P 500 Index. $10,000 $17,946
</TABLE>
Average Annual Total
Returns - Class C
-------------------------
With Sales Load
11.1% Since Inception
3.4% for 1 Year
Without Sales Load
11.1% Since Inception
4.4% for 1 Year
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
=======
Class Z
=======
3/1/96 4/30/97
------ -------
<S> <C> <C>
Prudential Multi-Sector Fund, Inc. $10,000 $10,927
S&P 500 Index. $10,000 $12,697
</TABLE>
Average Annual Total
Returns - Class Z
-------------------------
Without Sales Load
7.9% Since Inception
5.5% for 1 Year
<PAGE>
==================
[LOGO]Prudential ------------
Investments BULK RATE
================== U.S. POSTAGE
Prudential Mutual Funds PAID
Gateway Center Three Permit 6807
100 Mulberry Street New York, NY
Newark, NJ 07102-4077 ------------
(800) 225-1852
74435J108 Prudential
74435J207 MF142E2 Multi-Sector
74435J306 Cat#4441347 Fund, Inc.
74435J405
========================================
========================================
[PHOTO]
========================================
SEMI
ANNUAL
REPORT
Oct. 31, 1997
========================================
[LOGO] Prudential
Investments
<PAGE>
Prudential Multi-Sector Fund, Inc.
Performance At A Glance.
The Prudential Multi-Sector Fund beat the volatile overall market (as
represented by the Standard & Poor's 500 Index) by five percentage points for
the six months ending October 31. Our energy holdings did particularly well and
low-performing industrial stocks were a smaller part of our portfolio than of
the index. Nonetheless, we trailed the average capital appreciation fund, as
measured by Lipper Analytical Services, because our health care stocks lost
ground and we didn't participate in the exceptionally high returns of money
center banks and stock brokerages.
<TABLE>
<CAPTION>
================================================================================
Cumulative Total
Returns(1)
As of 10/31/97
================================================================================
Six One Five Since
Months Year Years Inception(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 20.28% 20.86% 122.34% 160.38%
- -------------------------------------------------------------------------------
Class B 19.83 19.97 114.04 146.02
- -------------------------------------------------------------------------------
Class C 19.83 19.97 N/A 59.88
- -------------------------------------------------------------------------------
Class Z 20.39 21.06 N/A 31.55
- -------------------------------------------------------------------------------
Lipper Capital
Appreciation Fund Avg(3) 22.30 22.74 119.38 ***
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Returns(1)
As of 9/30/97
================================================================================
One Five Since
Year Years Inception(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 22.49% 17.44% 14.10%
- --------------------------------------------------------------------------------
Class B 22.98 17.64 14.02
- --------------------------------------------------------------------------------
Class C 26.98 N/A 17.89
- --------------------------------------------------------------------------------
Class Z 29.14 N/A 22.77
- --------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's share, when redeemed, may be worth
more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 5% for Class A
shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years, for Class B shares. Class C shares have a
1% CDSC for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, approximately seven years after purchase.
Class Z shares do not carry a sales charge or a distribution fee.
(2) Inception dates: Class A and Class B, 5/24/90; Class C, 8/1/94; Class Z,
3/1/96.
(3) These are average returns for the 240 funds in Lipper Analytical Services'
Capital Appreciation category for the past six months, 203 for the past
year, and 77 for the past five years.
*** Lipper Since Inception returns are: Class A, and Class B, 172.81%; Class C,
83.83%; and Class Z, 30.78% for all funds in each share class.
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
How Investments Compared.
(As of 10/31/97)
================================================================================
12-Month 20-Year Average Annual
Total Returns Total Returns
------------- ----------------------
<S> <C> <C>
U.S. Growth Funds
General Bond Funds <plot-points-to-come>
General Muni Debt Funds
Money Market Funds
</TABLE>
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
================================================================================
================================================================================
Greg Goldberg, Fund Manager
[PHOTO]
Portfolio
Managers' Report /s/ Greg Goldberg
The Fund seeks long-term capital growth by investing primarily in the stocks of
domestic and foreign companies in specific economic sectors. We invest with a
growth style, looking for stocks with above-average revenue and earnings growth.
We focus our stock selection on certain themes -- established long-term trends
- -- that may identify companies in different global markets or of any size. The
Fund may be affected to a greater extent by a single economic, political, or
regulatory development than a mutual fund that is not as concentrated. There can
be no assurance that the Fund will achieve its investment objective.
- --------------------------------------------------------------------------------
Evolving Strategy
Our strategy has evolved. We are still aggressively concentrated in the stocks
we think have the most growth potential. At least a third of our assets will be
in our top 10 stocks. But now we focus on long-term themes that guide our
selections.
However, because they are not cyclical, we can hold our strong growth stocks
longer.
- --------------------------------------------------------------------------------
Strategy Session.
- --------------------------------------------------------------------------------
We concentrate our portfolio in order to get the full benefit of our best stock
selections. Our 10 best stocks comprised 37% of the portfolio on October 31 and
our top 20 normally will comprise about two thirds. Our stock selection is
guided by themes -- trends that we believe will particularly favor some
industries or companies. We are currently following three investment themes:
The aging of America -- as the average age of the population increases, we
expect certain industries and firms to benefit, such as the health care and
leisure industries. Toys R Us is among our top 20 holdings because grandparents
tend to spend heavily on grandchildren.
Productivity means technology -- we increased our technology holdings to 32% of
total net assets as of October 31. We are avoiding companies focused on the
competitive home personal computer market, favoring instead software and
networking companies. Cisco Systems and 3Com are among our top five holdings.
Global economic expansion -- The global economy is growing rapidly, creating a
strong and widely based demand for energy. Recently we focused on oil service
companies, which are necessary to keep energy flowing. Schlumberger -- a large
supplier of oil servicing -- is our fourth largest holding.
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
================================================================================
Portfolio Composition.
Sectors expressed as a percentage
of net assets as of 10/31/97.
================================================================================
<S> <C>
Finance 8%
Cash 4%
Technology 32%
Industrial 9%
Consumer Growth 24%
Consumer Cyclical 8%
Energy 15%
================================================================================
</TABLE>
<PAGE>
What Went Well.
- --------------------------------------------------------------------------------
Some Winners.
Some of our investments had exceptional six-month returns in our reporting
period. For example, Crescent Real Estate and Patriot American Hospitality --
two REITs (real estate investment trusts) each gained more than 50%. The former
owns office buildings, the latter owns hotels. We took profits, reducing our
positions substantially.
The U.S. economic expansion provided strong returns for our investments in
financial services, particularly a pair of consumer credit companies: Imperial
Credit and The Money Store. These companies rose 53% and 32%, respectively.
Our technology holdings also had a good year. We took some profits on Uniphase,
a photonics company, but it is still among our 10 largest holdings. Photonics is
the technology for using light waves instead of electricity to carry data, as in
fiber optic cable and lasers. Uniphase rose 69%.
Our focus on oil service companies also helped our return. Schlumberger and
Smith International each rose almost 60%. We took some profits on Schlumberger,
but prices are volatile in this sector; we may buy more if the price declines
again. J. Ray McDermott gained more than 140%, while McDermott International,
Input/Output and one of our foreign holdings, Bouyges Offshore, almost doubled.
And Not So Well.
- --------------------------------------------------------------------------------
Some Rough Spots.
Two of our larger holdings, the hospital management firms Aetna and Columbia
HCA, turned in negative returns for the period. This industry is still young and
is struggling more than we anticipated to bring large-scale financial management
to medical care. In medical devices, we sold Boston Scientific at a loss because
the fall period for introducing new products revealed unforeseen problems.
Our purchase of 3Com is not going smoothly, largely because of its acquisition
of U.S. Robotics. 3Com is a networking company. This year it bought the premier
manufacturer of modem cards, which are the predominant home connection to the
internet. 3Com found its distribution channels, both domestically and overseas,
fully stocked. With high inventories, sales and earnings dropped and the stock
price followed. However, we expect the surplus inventory to be cleared out soon
and the company's basic strength to be reflected in its stock price.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Five Largest
Holdings.
<S> <C>
5.6% Cisco Systems
Computer Networking
5.2% Novartis AG (ADR)
Pharmaceuticals
4.4% 3Com Corp.
Computer Networking
4.1% Schlumberger
Oil Services
3.2% Nordstrom
Retail
</TABLE>
Expressed as a percentage of net assets as of 10/31/97.
- --------------------------------------------------------------------------------
Looking Ahead.
- --------------------------------------------------------------------------------
Our investment themes are long range. Productivity means technology leads us to
photonics, a technology still in its early stages. We expect this technology to
grow.
The accelerating sales of personal computers costing less than $1,000 will
expand the market, but will squeeze margins for both computer and component
manufacturers. We are focusing on software and networking companies, which we
think will be the long-term winners from greater computer use.
- --------------------------------------------------------------------------------
1
<PAGE>
President's Letter December 18, 1997
- --------------------------------------------------------------------------------
[PHOTO]
It Was Another Good Year.
Dear Shareholder:
By many measures 1997 was another good year for investors. The economy continued
its sixth straight year of moderate growth. Inflation remained subdued and
unemployment fell to record lows. Thanks to this favorable environment, the
stock market posted its third year of double-digit returns while bond values
rose as yields declined to five-year lows.
There were periods of uncertainty, of course. The financial markets declined
significantly three times during the year. Yet following each episode the
markets rebounded as investors took advantage of buying opportunities. That is
very important because it shows that investors today are not easily swayed by
temporary setbacks -- they choose to stay the course and are investing for the
long term.
As we begin a new year, here are a few thoughts to help guide your investment
decisions:
o Keep your investment expectations realistic. Seasoned investors know that
financial markets rise and fall -- as will the value of their holdings. Over
time, however, stocks have been shown to produce very attractive returns. In
fact, the S&P 500 rose more than 280% from the time of the last major market
decline (October 31, 1987) through December 31, 1996, according to Lipper
Analytical Services.
o Don't make rash decisions. If you have an investment plan, stick to it. (If
you don't have one, see your Prudential Financial Professional.) While past
performance is not indicative of future results, many investors have profited by
the long-term growth prospects of stocks and income producing potential of
bonds.
o Review your portfolio. Sit down with your Prudential Securities Financial
Advisor or Pruco Securities Registered Representative today. Your Prudential
professional can advise you on financial strategies and explain important new
developments, such as the federal Taxpayer Relief Act of 1997, which may change
the way you save for college, a retirement nest egg or other long-term financial
goal.
Thank you for your continued confidence in Prudential Mutual Funds & Annuities.
In 1998, we'll do everything we can to keep you informed and earn your trust.
Sincerely,
/s/ Brian M. Storms
Brian M. Storms
President, Prudential Mutual Funds & Annuities
- ----------------------------------------------------------------------------
2
<PAGE>
Portfolio of Investments as of October 31, 1997
(Unaudited)
PRUDENTIAL MULTI-SECTOR FUND, INC.
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--96.9%
COMMON STOCKS--96.9%
- ---------------------------------------------------------------
Agriculture Sector--2.1%
214,200 Archer-Daniels Midland Co. $ 4,765,950
55,400 Potash Corp. of Saskatchewan, Inc. 4,539,337
------------
9,305,287
- ---------------------------------------------------------------
Auto Sector--0.7%
44,900 General Motors Corp. 2,882,019
- ---------------------------------------------------------------
Basic Industry Sector--3.6%
279,800 Agrium, Inc. (Canada) 3,132,201
200,000 Corrections Corporation of America
(a) 6,100,000
175,000 USA Waste Services, Inc. (a) 6,475,000
------------
15,707,201
- ---------------------------------------------------------------
Consumer Goods & Services Sector--1.4%
137,700 Corning, Inc. 6,213,713
- ---------------------------------------------------------------
Energy Sector--14.9%
340,650 Bouygues Offshore S.A. (ADR) 8,260,762
36,100 Coflexip 1,985,500
136,600 Input/Output, Inc. (a) 3,662,588
176,450 J. Ray McDermott, S.A. (a) 7,300,619
303,550(b) McDermott International, Inc. 11,022,659
165,850 Pioneer Natural Resources Co. 6,644,366
203,900(b) Schlumberger Ltd. 17,841,250
117,450 Smith International, Inc. (a) 8,955,562
------------
65,673,306
- ---------------------------------------------------------------
Financial Services Sector--8.2%
331,300 Banco Rio De La Plata SA (ADR)
(Argentina) (a) 3,478,650
197,000(b) Federal National Mortgage
Association 9,542,187
317,900(b) Imperial Credit Industries, Inc.
(a) 7,987,238
1 Patriot American Hospitality Inc. 22
163,400 ReliaStar Financial Corp. 6,107,075
309,200(b) The Money Store, Inc. $ 8,773,550
1 Travelers Group, Inc. 70
------------
35,888,792
- ---------------------------------------------------------------
Health Care Sector--14.1%
147,200(b) Aetna Inc. 10,460,400
337,450(b) Columbia/HCA Healthcare Corp. 9,532,962
37,200 Johnson & Johnson Co. 2,134,350
96,200(b) Manor Care, Inc. 3,300,863
290,700 Novartis AG (ADR) (Switzerland) 22,747,275
177,600 Premier Research Worldwide, LTD.
(a) 1,998,000
132,600 Sierra Health Services, Inc. (a) 4,897,912
285,600 Trigon Healthcare, Inc. (a) 6,979,350
------------
62,051,112
- ---------------------------------------------------------------
Leisure Sector--4.9%
146,900 Carnival Corp.-Class A 7,124,650
138,600 Hilton Hotels Corp. 4,270,612
558,600(b) La Quinta Inns, Inc. 9,984,975
------------
21,380,237
- ---------------------------------------------------------------
Medical Technology--0.5%
75,200 Spine-Tech Inc (a) 2,340,600
- ---------------------------------------------------------------
Precious Metals Sector--2.9%
338,700 UCAR International, Inc. (a) 12,701,250
- ---------------------------------------------------------------
Retailing Sector--9.5%
228,000(b) Nordstrom, Inc. 13,965,000
35,000 Proffitt's, Inc. (a) 1,004,063
155,000 Sears Roebuck & Co. 6,490,625
494,200(b) The Limited, Inc. 11,644,587
255,500 Toys 'R' Us, Inc. (a) 8,702,969
------------
41,807,244
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
Portfolio of Investments as of October 31, 1997
(Unaudited)
PRUDENTIAL MULTI-SECTOR FUND, INC.
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
Technology Sector--32.9%
464,100 3Com Corp. (a) $ 19,231,144
317,275(b) ADC Telecommunications, Inc. (a) 10,509,734
440,000(b) Bay Networks, Inc. (a) 13,915,000
352,600(b) BDM International, Inc. (a) 7,801,275
76,950 Boston Scientific Corp. (a) 3,501,225
298,700 Cisco Systems, Inc. (a) 24,502,734
204,000 Cognizant Corp. 7,994,250
159,000 Comverse Technology, Inc. (a) 6,558,750
117,500 Documentum Inc. (a) 3,510,313
498,000 Glenayre Technologies, Inc. (a) 6,474,000
70,000 Harmonic Lightwaves Inc. 875,000
319,600 Larscom, Inc. (a) 3,196,000
65,000 Network Associates, Inc. (a) 3,233,750
306,000 Premisys Communications Inc. (a) 8,338,500
350,000 Rational Software Corp. (a) 3,193,750
61,200 Tellabs, Inc. (a) 3,304,800
191,600 Uniphase Corp. (a) 12,861,150
322,350 Westell Technologies, Inc. (a) 5,681,419
------------
144,682,794
- ---------------------------------------------------------------
Transportation Sector--1.2%
425,000 OMI Corp. (a) 5,073,438
Total long-term investments
(cost $379,384,090) 425,706,993
------------
Principal
Amount
(000)
- --------
SHORT-TERM INVESTMENTS--5.2%
REPURCHASE AGREEMENT
- ---------------------------------------------------------------
$23,027 Joint Repurchase Agreement Account
5.70%, 11/3/97, (Note 5)
(cost $23,027,000) 23,027,000
------------
Total investments before
short sales--102.1%
(cost $402,411,090; Note 4) 448,733,993
------------
COMMON STOCK SOLD SHORT(a)--(1.3%)
- ---------------------------------------------------------------
Retailing Sector--(0.4%)
50,000 General Nutrition Co. $ (1,575,000)
- ---------------------------------------------------------------
Technology Sector--(0.5%)
20,500 Aware, Inc. (248,562)
58,400 Hutchinson Technology, Inc. (1,540,300)
14,000 Innovex, Inc. (361,375)
------------
(2,150,237)
- ---------------------------------------------------------------
Restaurants Sector--(0.4%)
68,000 Cracker Barrel Old Country Store,
Inc. (2,006,000)
------------
Total common stocks sold short
(proceeds $5,277,681) (5,731,237)
------------
Total investments, net of short sales--100.8% 443,002,756
Other liabilities in excess of
other assets--(0.8%) (3,628,761)
------------
Net Assets--100% $439,373,995
============
- ---------------
(a) Non-income producing security.
(b) Pledged as collateral on short sale.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
4
<PAGE>
Statement of Assets and Liabilities
(Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets October 31, 1997
<S> <C>
Investments, at value (cost $402,411,090)................................................................. $448,733,993
Cash...................................................................................................... 8,631
Receivable for investments sold........................................................................... 4,059,822
Deposits with broker for securities sold short............................................................ 1,638,816
Dividends and interest receivable......................................................................... 483,270
Receivable for Fund shares sold........................................................................... 145,158
Other assets.............................................................................................. 10,494
----------------
Total assets........................................................................................... 455,080,184
----------------
Liabilities
Payable for investments purchased......................................................................... 8,322,159
Investments sold short, at value (proceeds $5,277,681).................................................... 5,731,238
Payable for Fund shares reacquired........................................................................ 769,104
Accrued expenses.......................................................................................... 431,866
Management fee payable.................................................................................... 248,078
Distribution fee payable.................................................................................. 203,744
----------------
Total liabilities...................................................................................... 15,706,189
----------------
Net Assets................................................................................................ $439,373,995
================
Net assets were comprised of:
Common stock, at par................................................................................... $ 28,485
Paid-in capital in excess of par....................................................................... 310,076,775
----------------
310,105,260
Distributions in excess of net investment income....................................................... (1,011,047)
Accumulated net realized capital and currency gains.................................................... 84,410,496
Net unrealized appreciation on investments and foreign currencies...................................... 45,869,286
----------------
Net assets, October 31, 1997.............................................................................. $439,373,995
================
Class A:
Net asset value and redemption price per share
($263,609,121 / 16,892,734 shares of common stock issued and outstanding)........................... $15.60
Maximum sales charge (5% of offering price)............................................................ .82
----------------
Maximum offering price to public....................................................................... $16.42
================
Class B:
Net asset value, offering price and redemption price per share
($155,290,744 / 10,275,867 shares of common stock issued and outstanding)........................... $15.11
================
Class C:
Net asset value, offering price and redemption price per share
($4,403,207 / 291,417 shares of common stock issued and outstanding)................................ $15.11
================
Class Z:
Net asset value, offering price and redemption price per share
($16,070,923 / 1,026,801 shares of common stock issued and outstanding)............................. $15.65
================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
5
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
Six Months
Ended
October 31,
Net Investment Loss 1997
-----------
Income
Dividends................................... $ 1,773,089
Interest.................................... 634,142
-----------
Total income............................. 2,407,231
-----------
Expenses
Management fee.............................. 1,437,364
Distribution fee--Class A................... 302,578
Distribution fee--Class B................... 976,250
Distribution fee--Class C................... 23,456
Transfer agent's fees and expenses.......... 383,000
Custodian's fees and expenses............... 138,000
Reports to shareholders..................... 93,000
Registration fees........................... 55,000
Legal fees and expenses..................... 19,000
Audit fee and expenses...................... 13,000
Directors' fees and expenses................ 11,250
Miscellaneous............................... 7,092
-----------
Total expenses........................... 3,458,990
-----------
Net investment loss............................ (1,051,759)
-----------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain on:
Investment transactions..................... 82,948,944
Foreign currency transactions............... 99,912
Short sale transactions..................... 1,407,487
-----------
84,456,343
-----------
Net change in unrealized appreciation
(depreciation) on:
Investments................................. (1,069,947)
Foreign currency transactions............... (80,575)
Short sales................................. (291,734)
-----------
(1,442,256)
-----------
Net gain on investments and foreign currency
transactions................................ 83,014,087
-----------
Net Increase in Net Assets
Resulting from Operations...................... $81,962,328
===========
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
Six Months
Ended Year Ended
Increase October 31, April 30,
in Net Assets 1997 1996
---------------- ------------
Operations
Net investment income
(loss)..................... $ (1,051,759) $ 455,351
Net realized gain on
investments and foreign
currencies................. 84,456,343 42,517,921
Net change in unrealized
appreciation (depreciation)
of investments............. (1,442,256) (20,779,387)
---------------- ------------
Net increase in net assets
resulting from
operations................. 81,962,328 22,193,885
---------------- ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A.................... -- (400,225)
Class B.................... -- --
Class C.................... -- --
Class Z.................... -- (55,126)
---------------- ------------
-- (455,351)
---------------- ------------
Distributions in excess of net
investment income
Class A.................... (373,455) (566,340)
Class B.................... (339,853) (620,254)
Class C.................... (7,855) (12,405)
Class Z.................... (30,482) (50,726)
---------------- ------------
(751,645) (1,249,725)
---------------- ------------
Distributions from net capital
gains
Class A.................... (8,064,541) (23,717,108)
Class B.................... (7,344,836) (25,810,921)
Class C.................... (169,575) (537,914)
Class Z.................... (658,409) (2,170,377)
---------------- ------------
(16,237,361) (52,236,320)
---------------- ------------
Fund share transactions (net of
share conversion) (Note 6)
Net proceeds from Fund shares
subscribed................. 51,492,073 116,532,381
Net asset value of Fund shares
issued in reinvestment of
dividends and
distributions.............. 15,959,019 50,651,007
Cost of shares reacquired..... (109,542,140) (196,343,364)
---------------- ------------
Net decrease in net assets
from Fund share
transactions............... (42,091,048) (29,159,976)
---------------- ------------
Total increase (decrease)........ 22,882,274 (60,907,487)
Net Assets
Beginning of period.............. 416,491,721 477,399,208
---------------- ------------
End of period.................... $ 439,373,995 $416,491,721
================ ============
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
6
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
Prudential Multi-Sector Fund, Inc. (the 'Fund'), is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund was incorporated in Maryland on February 21, 1990 and had no
operations until May 11, 1990 when 4,398 shares each of Class A and Class B
common stock were sold for $100,000 to Prudential Investments Fund Management
LLC ('PIFM'). Investment operations commenced June 29, 1990. The Fund's
investment objective is long-term growth of capital by primarily investing in
equity securities of companies in various economic sectors.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments, including options and securities sold short,
traded on a national securities exchange and NASDAQ national market equity
securities are valued at the last reported sales price on the primary exchange
on which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges whose primary market is believed to be
over-the-counter) and listed securities for which no sales were reported on that
date are valued at the mean between the last reported bid and asked prices.
Stock options traded on national securities exchanges are valued at the closing
prices on such exchanges. 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 Fund's Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults, and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at year end. Similarly, the Fund does not isolate the
effect of changes in foreign exchange rates from the fluctuations arising from
changes in the market prices of long-term portfolio securities sold during the
fiscal year. Accordingly, such realized foreign currency gains (losses) are
included in the reported net realized gains (losses) on investment transactions.
Net realized gain on foreign currency transactions of $99,912 represents net
foreign exchange gains from sales and maturities of short-term securities,
holding of foreign currencies, currency gains or losses realized between the
trade and settlement dates of security transactions, and the difference between
the amounts of dividends, interest and foreign taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
currency gains and losses from valuing foreign currency denominated assets and
liabilities at year end exchange rates are reflected as a component of net
unrealized appreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of
- --------------------------------------------------------------------------------
7
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
their contracts. There were no open foreign currency contracts at October 31,
1997.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale. The proceeds received from
the short sale are maintained 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.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Net
investment income, other than distribution fees, and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Expenses are recorded on the accrual basis which may require the use of certain
estimates by management.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from options. The difference between the premium and the
amount paid on effecting a closing purchase transaction, including brokerage
commissions, is also treated as a realized gain, or if the premium received is
less than the amount paid for the closing purchase transaction, as a realized
loss. If a call option is exercised, the premium is added to the proceeds from
the sale of the underlying security or currency in determining whether the Fund
has realized a gain or loss. If a put option is exercised, the premium reduces
the cost basis of the securities or currencies purchased by the Fund. The Fund,
as writer of an option may have no control over whether the underlying
securities may be sold (call) or purchased (put) and, as a result, bears the
market risk of an unfavorable change in the price of the security or currency
underlying the written option.
Dividends and Distributions: Dividends from net investment income are declared
and paid semi-annually. The Fund will distribute net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the A.I.C.P.A.'s 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 six months ended October 31, 1997, the Fund reclassified
$19,338 of foreign currency gains which were recognized for tax purposes in the
current fiscal year by increasing undistributed net investment income and
decreasing accumulated net realized capital and currency gains. Net investment
income, net realized gains, and net assets were not affected by this change.
Taxes: It is the Fund's policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'). PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .65 of 1% of the Fund's average daily net assets. For the fiscal year
ended April 30, 1998, the manager has agreed to limit its management fee to no
more than .625 of 1% of the first $500 million of the average daily net assets
of the Fund, .55 of 1% of the next $500 million of average daily net assets and
.50 of 1% of the Fund's average daily net assets in excess of $1 billion.
- --------------------------------------------------------------------------------
8
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
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.
Such expenses under the Plans were .25 of 1% of the average daily net assets of
Class A shares and 1% of the average daily net assets of both the Class B and C
shares for the six months ended October 31, 1997.
PSI has advised the Fund that they have received approximately $26,700 in
front-end sales charges resulting from sales of Class A shares during the six
months ended October 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 Fund that for the six months ended October 31, 1997, it
received approximately $198,000 and $300 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC 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
$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 an an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of October 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 October 31,
1997, the Fund incurred fees of approximately $324,000 for the services of PMFS.
As of October 31, 1997, approximately $52,700 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 October 31, 1997, PSI earned approximately $37,500 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 October 31, 1997 were $304,988,179 and $365,480,883,
respectively.
The cost basis of investments for federal income tax purposes at October 31,
1997 was $403,182,342 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $45,551,651 (gross unrealized
appreciation--$69,788,803, gross unrealized depreciation--$24,237,152).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of October 31, 1997, the Fund
had a 2.9% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represents $23,027,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefore were as follows:
Bear Stearns, 5.70%, in the principal amount of $236,000,000, repurchase price
$236,112,100, due 11/3/97. The value of the collateral including accrued
interest is $241,912,917.
Credit Suisse First Boston Corp., 5.72%, in the principal amount of
$237,440,000, repurchase price $237,553,180, due 11/3/97. The value of the
collateral including accrued interest is $246,134,363.
Deutsche Morgan Grenfell, 5.70%, in the principal amount of $236,000,000,
repurchase price $236,112,100, due 11/3/97. The value of the collateral
including accrued interest is $240,720,618.
SBC Warburg, 5.66%, in the principal amount of $92,714,000, repurchase price
$92,757,730, due 11/3/97. The value of the collateral including accrued interest
is $94,588,984.
- --------------------------------------------------------------------------------
9
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has authorized 2 billion shares of common stock, $.001 par value per
share, equally divided into four classes, designated Class A, B, C and Class Z
common stock.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ------- ---------------- -------------
Six months ended October 31,
1997:
Shares sold................... 2,753,244 $ 41,930,887
Shares issued in reinvestment
of
distributions............... 541,817 7,932,202
Shares reacquired............. (4,348,356) (66,649,480)
---------------- -------------
Net decrease in shares
outstanding before
conversion.................. (1,053,295) (16,786,391)
Shares issued upon conversion
from Class B................ 2,886,761 45,712,544
---------------- -------------
Net increase in shares
outstanding................. 1,813,466 $ 28,926,153
================ =============
Year ended April 30, 1997:
Shares sold................... 6,197,250 $ 86,386,710
Shares issued in reinvestment
of dividends and
distributions............... 1,685,407 23,239,649
Shares reacquired............. (8,634,608) (120,199,576)
---------------- -------------
Net decrease in shares
outstanding before
conversion.................. (751,951) (10,573,217)
Shares issued upon conversion
from Class B................ 1,116,749 15,549,557
---------------- -------------
Net increase in shares
outstanding................. 364,798 $ 4,976,340
================ =============
Class B Shares Amount
- ------- ---------------- -------------
Six months ended October 31,
1997:
Shares sold................... 314,859 $ 4,687,076
Shares issued in reinvestment
of distributions............ 504,116 7,168,527
Shares reacquired............. (2,196,309) (32,592,345)
---------------- -------------
Net decrease in shares
outstanding before
conversion.................. (1,377,334) (20,736,742)
Shares reacquired upon
conversion
from Class A................ (2,956,049) (45,712,544)
---------------- -------------
Net decrease in shares
outstanding................. (4,333,383) $ (66,449,286)
================ =============
Year ended April 30, 1997:
Shares sold................... 1,236,387 $ 16,762,196
Shares issued in reinvestment
of distributions............ 1,823,196 24,608,185
Shares reacquired............. (4,273,687) (57,627,667)
---------------- -------------
Net decrease in shares
outstanding before
conversion.................. (1,214,104) (16,257,286)
Shares reacquired upon
conversion
from Class A................ (1,142,516) (15,549,557)
---------------- -------------
Net decrease in shares
outstanding................. (2,356,620) $ (31,806,843)
================ =============
Class C
- -------
Six months ended October 31,
1997:
Shares sold................... 16,563 $ 244,621
Shares issued in reinvestment
of distributions............ 11,913 169,403
Shares reacquired............. (64,819) (963,459)
---------------- -------------
Net decrease in shares
outstanding................. (36,343) $ (549,435)
================ =============
Year ended April 30, 1997:
Shares sold................... 63,373 $ 852,741
Shares issued in reinvestment
of distributions............ 39,044 526,955
Shares reacquired............. (137,317) (1,878,420)
---------------- -------------
Net decrease in shares
outstanding................. (34,900) $ (498,724)
================ =============
Class Z
- -------
Six months ended October 31,
1997:
Shares sold................... 303,219 $ 4,629,489
Shares issued in reinvestment
of distributions............ 46,959 688,887
Shares reacquired............. (612,191) (9,336,856)
---------------- -------------
Net decrease in shares
outstanding................. (262,013) $ (4,018,480)
================ =============
- --------------------------------------------------------------------------------
10
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
Class Z Shares Amount
- ------- ---------------- -------------
Year ended April 30, 1997:
Shares sold................... 897,823 $ 12,530,734
Shares issued in reinvestment
of dividends and
distributions............... 165,237 2,276,218
Shares reacquired............. (1,204,635) (16,637,701)
---------------- -------------
Net decrease in shares
outstanding................. (141,575) $ (1,830,749)
================ =============
- ------------------------------------------------------------
Note 7. Distributions
On November 20, 1997 the Board of Directors of the Fund declared a distribution
from net short-term capital gains of $1.34 per share and from net long-term
caital gains of $1.615 per share for Class A, B, C and Z shares, respectively,
payable on November 28, 1997 to shareholders of record on November 25, 1997.
- --------------------------------------------------------------------------------
11
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------
Six Months
Ended Years Ended April 30,
October 31, ---------------------------------------------------------
1997 1997 1996 1995(a) 1994 1993
----------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 13.48 $ 14.40 $ 13.45 $ 13.21 $ 13.19 $ 12.51
----------- -------- -------- ------- ------- -------
Income from investment operations:
Net investment income...................... (.03) .06 .09 .09 .18 .30
Net realized and unrealized gain on
investments and foreign currency
transactions............................ 2.72 .70 2.52 1.44 1.64 1.47
----------- -------- -------- ------- ------- -------
Total from investment operations........ 2.69 .76 2.61 1.53 1.82 1.77
----------- -------- -------- ------- ------- -------
Less distributions:
Dividends from net investment income....... -- (.03) (.04) -- (.21) (.30)
Distributions in excess of net investment
income.................................. (.03) (.04) -- -- -- --
Distributions from net capital and currency
gains................................... (.54) (1.61) (1.62) (1.29) (1.59) (.79)
----------- -------- -------- ------- ------- -------
Total distributions..................... (.57) (1.68) (1.66) (1.29) (1.80) (1.09)
----------- -------- -------- ------- ------- -------
Net asset value, end of period............. $ 15.60 $ 13.48 $ 14.40 $ 13.45 $ 13.21 $ 13.19
=========== ======== ======== ======= ======= =======
TOTAL RETURN(b):........................... 20.28% 5.24% 20.69% 12.15% 14.16% 15.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 263,609 $203,197 $211,920 $76,035 $53,237 $43,390
Average net assets (000)................... $ 240,089 $211,504 $201,315 $59,316 $49,840 $46,890
Ratios to average net assets:
Expenses, including distribution fees... 1.19%(c) 1.23% 1.23% 1.44% 1.30% 1.28%
Expenses, excluding distribution fees... .94%(c) .98% .98% 1.19% 1.08% 1.08%
Net investment income................... (.18)%(c) .48% .47% .68% 1.15% 2.44%
For Class A, B, C and Z shares:
Portfolio turnover rate.................... 70% 99% 136% 122% 110% 209%
Average commission rate paid per share..... $ .0553 $ .0572 $ .0537 N/A N/A N/A
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(c) Annualized.
- --------------------------------------------------------------------------------
12
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------------
Six Months
Ended Years Ended April 30,
October 31, -----------------------------------------------------------
1997 1997 1996 1995(a) 1994 1993
----------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 13.11 $ 14.13 $ 13.29 $ 13.16 $ 13.15 $ 12.47
----------- -------- -------- -------- -------- -------
Income from investment operations:
Net investment income (loss)............... (.13) (.05) .02 (.01) .07 .19
Net realized and unrealized gain on
investments and foreign currency
transactions............................ 2.70 .68 2.45 1.43 1.63 1.47
----------- -------- -------- -------- -------- -------
Total from investment operations........ 2.57 .63 2.47 1.42 1.70 1.66
----------- -------- -------- -------- -------- -------
Less distributions:
Dividends from net investment income....... -- -- (.01) -- (.10) (.19)
Distributions in excess of net investment
income.................................. (.03) (.04) -- -- -- --
Distributions from net capital and currency
gains................................... (.54) (1.61) (1.62) (1.29) (1.59) (.79)
----------- -------- -------- -------- -------- -------
Total distributions..................... (.57) (1.65) (1.63) (1.29) (1.69) (.98)
----------- -------- -------- -------- -------- -------
Net asset value, end of period............. $ 15.11 $ 13.11 $ 14.13 $ 13.29 $ 13.16 $ 13.15
=========== ======== ======== ======== ======== =======
TOTAL RETURN(b):........................... 19.83% 4.43% 19.84% 11.31% 13.22% 14.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 155,291 $191,599 $239,739 $185,474 $128,098 $92,921
Average net assets (000)................... $ 193,658 $219,249 $236,580 $153,209 $108,981 $99,072
Ratios to average net assets:
Expenses, including distribution fees... 1.94%(c) 1.98% 1.98% 2.19% 2.08% 2.08%
Expenses, excluding distribution fees... .94%(c) .98% .98% 1.19% 1.08% 1.08%
Net investment income (loss)............ (.85)%(c) (.28)% (.22)% (.07)% .35% 1.64%
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(c) Annualized.
- --------------------------------------------------------------------------------
13
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
--------------------------------------------------- ---------------------------
August 1,
Six Months 1994(d) Six Months
Ended Years Ended April 30, Through Ended Year Ended
October 31, --------------------- April 30, October 31, April 30,
1997 1997 1996 1995(a) 1997 1997
----- ----- ------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 13.11 $14.13 $13.29 $ 13.74 $ 13.50 $ 14.41
----- ----- ------ --------- ----------- -----------
Income from investment operations:
Net investment income (loss)............... (.08) (.04) .03 -- .03 .11
Net realized and unrealized gain on
investments and foreign currency
transactions............................ 2.65 .67 2.44 .84 2.69 .67
----- ----- ------ --------- ----------- -----------
Total from investment operations........ 2.57 .63 2.47 .84 2.72 .78
----- ----- ------ --------- ----------- -----------
Less distributions:
Dividends from net investment income....... -- -- (.01) -- -- (.04)
Distributions in excess of net investment
income.................................. (.03) (.04) -- -- (.03) (.04)
Distributions from net capital and currency
gains................................... (.54) (1.61) (1.62) (1.29) (.54) (1.61)
----- ----- ------ --------- ----------- -----------
Total distributions..................... (.57) (1.65) (1.63) (1.29) (.57) (1.69)
----- ----- ------ --------- ----------- -----------
Net asset value, end of period............. $ 15.11 $13.11 $14.13 $ 13.29 $ 15.65 $ 13.50
===== ===== ====== ========= =========== ===========
TOTAL RETURN(b):........................... 19.83% 4.43% 19.84% 6.62% 20.39% 5.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 4,403 $4,298 $5,125 $ 3,587 $16,071 $17,398
Average net assets (000)................... $ 4,653 $4,708 $5,056 $ 1,653 $17,806 $19,206
Ratios to average net assets:
Expenses, including distribution fees... 1.94%(c) 1.98% 1.98% 2.37%(c) .94%(c) .98%
Expenses, excluding distribution fees... .94%(c) .98% .98% 1.37%(c) .94%(c) .98%
Net investment income (loss)............ (.89)%(c) (.27)% (.21)% .03%(c) .13%(c) .74%
<CAPTION>
March 1,
1996(e)
Through
April 30,
1996
----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 13.91
----------
Income from investment operations:
Net investment income (loss)............... .01
Net realized and unrealized gain on
investments and foreign currency
transactions............................ .49
----------
Total from investment operations........ .50
----------
Less distributions:
Dividends from net investment income....... --
Distributions in excess of net investment
income.................................. --
Distributions from net capital and currency
gains................................... --
----------
Total distributions..................... --
----------
Net asset value, end of period............. $ 14.41
==========
TOTAL RETURN(b):........................... 3.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 20,616
Average net assets (000)................... $ 20,298
Ratios to average net assets:
Expenses, including distribution fees... .98%(c)
Expenses, excluding distribution fees... .98%(c)
Net investment income (loss)............ .54%(c)
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
14
<PAGE>
================================================================================
Getting The Most From Your Prudential Mutual Fund.
- --------------------------------------------------------------------------------
When you invest through Prudential Mutual Funds, you receive financial advice
through a Prudential Securities financial advisor or Prudential/Pruco Securities
registered representative. Your advisor or representative can provide you with
the following services:
- --------------------------------------------------------------------------------
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. And risk can be difficult to
gauge --sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction -- there
are times when a market sector or asset class will lose value or provide little
in the way of total return. Managing your own expectations is easier with help
from someone who understands the markets and who knows you!
- --------------------------------------------------------------------------------
Keeping Up With The Joneses.
A financial advisor or registered representative can help you wade through the
numerous mutual funds available to find the ones that fit your own individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals, not at you personally. Your financial
advisor or registered representative will review your investment objectives with
you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance -- not just based
on the current investment fad.
- --------------------------------------------------------------------------------
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the bottom are among the
most common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and remind you that you're investing for the long haul.
<PAGE>
================================================================================
Getting The Most From Your Prudential Mutual Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Change Your Mind.
You can exchange your shares in most Prudential Mutual Funds for shares in most
other Prudential Mutual Funds, without charges. This may be most helpful if your
investment needs change.
- --------------------------------------------------------------------------------
Reinvest Dividends Free Of Charge.
Reinvest your dividends and/or capital gains distributions automatically --
without charge.
- --------------------------------------------------------------------------------
Invest For Retirement.
There is no minimum investment for an IRA. Plus, you defer taxes on your
investment earnings by investing in an IRA.
If you'd like, you can contribute up to $2,000 a year in an IRA. And if you are
married and not covered by a retirement plan at work, you and your spouse may
each contribute $2,000 a year to an IRA for a total of $4,000.
- --------------------------------------------------------------------------------
Change Your Job.
You can take your pension with you. Use a rollover IRA to manage your
company-sponsored retirement plan while retaining the special tax-deferred
advantages.
- --------------------------------------------------------------------------------
Invest In Your Children.
There's no fee to open a custodial account for a child's education or other
needs.
- --------------------------------------------------------------------------------
Take Income.
Would you like to receive monthly or quarterly checks in any amount from
your fund account? Just let us know. We'll take care of it. Of course, there are
minimum amounts. And shares redeemed may be subject to tax, and Class B and C
shares may be subject to contingent deferred sales charges. We'll gladly answer
your questions.
- --------------------------------------------------------------------------------
Keep Informed.
We want to keep you up-to-date. Of course, you receive account activity
statements every quarter. But you also receive annual and semi-annual fund
reports, as well as other important updates on events that affect your
investments, including tax information.
This material is only authorized for distribution when preceded or accompanied
by a current prospectus. Read the prospectus carefully before you invest or send
money.
<PAGE>
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Donald D. Lennox
Douglas H. McCorkindale
Mendel A. Melzer
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Thomas A. Early, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E. H. Morrison, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
The accompanying financial statements as of October 31, 1997 were not audited
and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
