<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1998
REGISTRATION NOS. 33-61997, 811-7343
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 9
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
[X]
AMENDMENT NO. 10
(CHECK APPROPRIATE BOX OR BOXES)
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE (GC3)
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525
MARGUERITE E. H. MORRISON, ESQ.
GATEWAY CENTER THREE (GC3)
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] Immediately upon filing pursuant to paragraph (b)
[X] on November 30, 1998 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED. . . SHARES OF COMMON STOCK, PAR VALUE
$.001 PER SHARE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION IN PROSPECTUS
-------- ----------------------
PART A
<C> <S> <C>
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis.......................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information... Fund Expenses; Financial
Highlights; How the Funds
Calculate Performance
Item 4. General Description of Registrant. Cover Page; Fund Highlights; How
the Funds Invest; General
Information
Item 5. Management of the Fund............ How the Funds are Managed;
General Information; Shareholder
Guide
Item 5A. Management's Discussion of Fund Financial Highlights
Performance.......................
Item 6. Capital Stock and Other Taxes, Dividends and
Securities........................ Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being Shareholder Guide; How Each Fund
Offered........................... Values its Shares; How the Funds
are Managed
Item 8. Redemption or Repurchase.......... Shareholder Guide; How Each Fund
Values its Shares; General
Information
Item 9. Pending Legal Proceedings......... Not Applicable
PART B
<CAPTION>
Item 10. Cover Page......................... Cover Page
<C> <S> <C>
Item 11. Table of Contents................. Table of Contents
Item 12. General Information and History... General Information
Item 13. Investment Objectives and Investment Objectives and
Policies.......................... Policies; Investment Restrictions
Item 14. Management of the Fund............ Directors and Officers; Manager
and Subadvisers; Distributor
Item 15. Control Persons and Principal Not Applicable
Holders of Securities.............
Item 16. Investment Advisory and Other Manager and Subadvisers;
Services.......................... Distributor; Custodian, Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices.........................
Item 18. Capital Stock and Other Not Applicable
Securities........................
Item 19. Purchase, Redemption and Pricing
of Securities Purchase and Redemption of Fund
Being Offered.................... Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status........................ Taxes, Dividends and
Distributions
Item 21. Underwriters...................... Distributor
Item 22. Calculation of Performance Data... Performance Information
Item 23. Financial Statements.............. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment.
<PAGE>
PRUDENTIAL ACTIVE BALANCED FUND
- -------------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 30, 1998
- -------------------------------------------------------------------------------
Prudential Active Balanced Fund (the Fund) is a series of The Prudential
Investment Portfolios, Inc. (the Company), a diversified, open-end, management
investment company.
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK INCOME AND LONG-TERM GROWTH OF
CAPITAL BY INVESTING IN A PORTFOLIO OF EQUITY, FIXED-INCOME AND MONEY MARKET
SECURITIES WHICH IS ACTIVELY MANAGED TO CAPITALIZE ON OPPORTUNITIES CREATED BY
PERCEIVED MISVALUATION. The Fund's investments will be actively shifted among
equity securities, fixed-income securities and money market instruments in
order to capitalize on valuation opportunities and to maximize the Fund's
total investment return.
The Fund may engage in various derivative transactions such as using options
on stocks, stock indices and foreign currencies, entering into foreign
currency exchange contracts and the purchase and sale of futures contracts on
stock indices and foreign currencies and options thereon to hedge its
portfolio and to attempt to enhance return. There can be no assurance that the
Fund's investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies." The Company's address is Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its telephone
number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of The Prudential Insurance Company of America
(http://www.prudential.com). Additional information about the Fund has been
filed with the Securities and Exchange Commission (the Commission) in a
Statement of Additional Information, dated November 30, 1998, which
information is incorporated herein by reference (is legally considered a part
of this Prospectus) and is available without charge upon request to the
Company at the address or telephone number noted above. The Commission
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other
information regarding the Fund.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS THE FUND?
The Fund is a mutual fund. A mutual fund pools the resources of investors by
selling its shares to the public and investing the proceeds of such sale in a
portfolio of securities designed to achieve its investment objectives.
Technically, the Fund is a series of The Prudential Investment Portfolios,
Inc., an open-end, diversified, management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek income and long-term growth of
capital by investing in a portfolio of equity, fixed-income and money market
securities which is actively managed to capitalize on opportunities created by
perceived misvaluation. See "How the Fund Invests--Investment Objective and
Policies" at page 10.
There can be no assurance that the Fund's investment objective will be
achieved.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund invests primarily in common stocks of established companies with
growth prospects which are, in the opinion of the Fund's investment adviser,
The Prudential Investment Corporation, doing business as Prudential Investments
(PI, the Subadviser or the investment adviser), underappreciated by the market.
These may include companies that are experiencing important changes in their
business structure and management philosophy. The ability of the investment
adviser to successfully identify these changes will be a major factor in the
Fund's performance record. See "How the Fund Invests--Investment Objective and
Policies" at page 10.
The Fund may invest up to 15% of its total assets in equity securities of
foreign issuers and up to 20% of its total assets in debt securities of foreign
issuers. Investing in securities of foreign companies and countries involves
certain risks and considerations not typically associated with investments in
domestic companies. See "How the Fund Invests--Risk Factors and Special
Considerations of Investing in Foreign Securities" at page 17. The Fund may
commit up to 30% of the value of its total assets to investment techniques such
as dollar rolls, forward rolls and reverse repurchase agreements. See "How the
Fund Invests--Investment Objective and Policies--Forward Rolls, Dollar Rolls
and Reverse Repurchase Agreements" at page 15. The Fund may invest up to 20% of
the fixed-income portion of its portfolio in non-investment grade debt
securities or in unrated securities of comparable quality. Non-investment grade
securities are securities rated lower than Baa by Moody's Investors Service,
Inc. (Moody's) or BBB by Standard & Poor's Ratings Group (S&P) and are commonly
known as "junk bonds." These securities are considered speculative and are
subject to a greater risk of loss of principal and interest than higher rated
securities as well as greater price volatility. See "How the Fund Invests--Risk
Factors Relating to Investing in Debt Securities Rated Below Investment Grade
(Junk Bonds)" at page 18. The Fund may engage in various hedging and return
enhancement strategies including using derivatives. See "How the Fund Invests--
Hedging and Return Enhancement Strategies--Risks of Hedging and Return
Enhancement Strategies" at page 21. As with an investment in any mutual fund,
an investment in this Fund can decrease in value and you can lose money.
2
<PAGE>
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
manager of the Fund and is compensated for its services at an annual rate of
.65 of 1% of the Fund's average daily net assets. As of October 31, 1998, PIFM
served as manager or administrator to 67 investment companies, including 45
mutual funds, with aggregate assets of approximately $68.2 billion. PI
furnishes investment advisory services in connection with the management of the
Fund under a Subadvisory Agreement with PIFM. See "How the Fund is Managed--
Manager" at page 22.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares and is
paid a distribution and service fee with respect to Class A shares which is
currently being charged at the annual rate of .25 of 1% of the average daily
net assets of the Class A shares and is paid a distribution and service fee
with respect to Class B and Class C shares at an annual rate of 1% of the
average daily net assets of each of the Class B and Class C shares. The
Distributor incurs the expense of distributing the Fund's Class Z shares under
a Distribution Agreement with the Company, none of which is reimbursed or paid
for by the Fund. See "How the Fund is Managed--Distributor" at page 23.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
$2,500 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirements. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Investment Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 29 and "Shareholder Guide--Shareholder Services" at
page 40.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent). In each case, sales are made at the net asset value per share
(NAV) next determined after receipt of your purchase order by the Transfer
Agent, a Dealer or the Distributor plus a sales charge which may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at NAV without any sales charge. Dealers may charge their customers a
separate fee for handling purchase transactions. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. See "How the Fund
Values its Shares" at page 25 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 29.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class
3
<PAGE>
A shares, Class B shares will automatically convert to Class A
shares (which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
. Class C Shares: Sold with an initial sales charge of 1% and, for 18 months
after purchase, are subject to a CDSC of 1% on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but Class C shares do not convert to another class.
. Class Z Shares: Sold without an initial sales charge or CDSC to a limited
group of investors. Class Z shares are not subject to any
ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 30.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after your
Dealer, the Distributor or the Transfer Agent receives your sell order. The
proceeds of redemptions of Class B and Class C shares may be subject to a CDSC.
Dealers may charge their customers a separate fee for handling sale
transactions. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information about
selling their Class Z shares. See "Shareholder Guide--How to Sell Your Shares"
at page 34.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of any net investment income annually and
make distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 26.
4
<PAGE>
FUND EXPENSES
<TABLE>
<S> <C> <C> <C> <C>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases (as
a percentage of offering
price).................. 5% None 1% None
Maximum Sales Load
Imposed on Reinvested
Dividends............... None None None None
Maximum Deferred Sales
Load (as a percentage of
original purchase price
or redemption proceeds,
whichever is lower)..... None None
5% during the first year, 1% on redemptions
decreasing by 1% annually made within 18
to 1% in the fifth and sixth months of purchase
years and 0% the seventh
year*
Redemption Fees.......... None None None None
Exchange Fee............. None None None None
<CAPTION>
ANNUAL FUND OPERATING CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
EXPENSES -------------- -------------- -------------- --------------
(as a percentage of average
net assets)
<S> <C> <C> <C> <C>
Management Fees.......... .65% .65% .65% .65%
12b-1 Fees (After
Reduction).............. .25%++ 1.00% 1.00% None
Other Expenses........... .38% .38% .38% .38%
---- ---- ---- ----
Total Fund Operating
Expenses (After
Reduction).............. 1.28% 2.03% 2.03% 1.03%
==== ==== ==== ====
<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
investment, assuming (1)
5% annual return and (2)
redemption at the end of
each time period:
Class A................. $62 $89 $117 $197
Class B................. $71 $94 $119 $208
Class C................. $40 $73 $118 $243
Class Z................. $11 $33 $ 57 $126
You would pay the following
expenses on the same
investment, assuming no
redemption:
Class A................. $62 $89 $117 $197
Class B................. $21 $64 $109 $208
Class C................. $30 $73 $118 $243
Class Z................. $11 $33 $ 57 $126
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." The above example is based on expenses
incurred during the fiscal year ended September 30, 1998. "Other Expenses"
includes Directors' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian (domestic and foreign) fees (but
excludes foreign withholding taxes).
- --------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges (12b-1
fees) on shares of the Fund may not exceed 6.25% of total gross sales,
subject to certain exclusions. This 6.25% limitation is imposed on each
class of the Fund rather than on a per shareholder basis. Therefore,
long-term Class B and Class C shareholders of the Fund may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed--
Distributor."
++Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% of the average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Fund to .25 of 1%
of the average daily net assets of the Class A shares. This voluntary
waiver may be terminated at any time without notice. See "How the Fund is
Managed--Distributor." Total Fund Operating Expenses for Class A shares
without this limitation would be 1.33%.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A SHARES)
The following financial highlights for Class A shares for the periods ended
September 30, 1998 have been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class A share
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. Further performance information is contained
in the annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
---------------------------
NOVEMBER 7,
YEAR 1996(A)
ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $14.41 $13.40
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................ .44 .21 (b)
Net realized and unrealized gain on investment
transactions.................................... (.20) 1.97
------ ------
Total from investment operations............... .24 2.18
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income............. (.32) (.39)
Dividends from net realized gains................ (1.04) (.78)
------ ------
Total distributions............................ (1.36) (1.17)
------ ------
Net asset value, end of period................... $13.29 $14.41
====== ======
TOTAL RETURN(D):................................. 1.93% 17.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $3,218 $ 990
Average net assets (000)......................... $2,090 $ 100
Ratios to average net assets:
Expenses, including distribution fees........... 1.28% 1.31%(c)
Expenses, excluding distribution fees........... 1.03% 1.06%(c)
Net investment income........................... 2.72% 2.69%(c)
Portfolio turnover rate.......................... 256% 50%
</TABLE>
-----------
(a) Commencement of offering of Class A shares of Prudential Active
Balanced Fund, a series of Prudential Dryden Fund, whose assets and
liabilities were acquired by the Fund, Class A shares for Class A
shares, on January 23, 1998. Immediately prior to this transfer, the
Fund had no assets. The Fund is the accounting survivor to
Prudential Active Balanced Fund and, as such, financial data is
shown from November 7, 1996.
(b) Calculated based upon weighted average shares outstanding during the
year.
(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.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS B SHARES)
The following financial highlights for Class B shares for the periods ended
September 30, 1998 have been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class B share
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. Further performance information is contained
in the annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
---------------------------
NOVEMBER 7,
1996(A)
YEAR THROUGH
ENDED SEPTEMBER 30,
SEPTEMBER 30, 1997
1998 -------------
<S> ------------- <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $14.34 $13.40
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................... .27 .19 (b)
Net realized and unrealized gain on
investment transactions.................... (.14) 1.92
------ ------
Total from investment operations........... .13 2.11
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income........ (.21) (.39)
Distributions from net realized gains....... (1.04) (.78)
------ ------
Total distributions........................ (1.25) (1.17)
------ ------
Net asset value, end of period.............. $13.22 $14.34
====== ======
TOTAL RETURN(D): ........................... 1.10% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............. $3,038 $ 213
Average net assets (000).................... $1,285 $ 71
Ratios to average net assets:
Expenses, including distribution fees...... 2.03% 2.06%(c)
Expenses, excluding distribution fees...... 1.03% 1.06%(c)
Net investment income...................... 1.95% 1.94%(c)
Portfolio turnover rate..................... 256% 50%
</TABLE>
- -----------
(a) Commencement of offering of Class B shares of Prudential Active Balanced
Fund, a series of Prudential Dryden Fund whose assets and liabilities were
acquired by the Fund, Class B shares for Class B shares, on January 23,
1998. Immediately prior to this transfer, the Fund had no assets. The Fund
is the accounting survivor to Prudential Active Balanced Fund and, as
such, financial data is shown from November 7, 1996.
(b) Calculated based upon weighted average shares outstanding during the year.
(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.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS C SHARES)
The following financial highlights for Class C shares for the periods ended
September 30, 1998 have been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class C share
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. Further performance information is contained
in the annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
---------------------------
NOVEMBER 7,
YEAR 1996(A)
ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $14.34 $13.40
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................ .48 .13(b)
Net realized and unrealized gain on investment
transactions.................................... (.35) 1.98
------ ------
Total from investment operations................ .13 2.11
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income............. (.21) (.39)
Distributions from net realized gains............ (1.04) (.78)
------ ------
Total distributions............................. (1.25) (1.17)
------ ------
Net asset value, end of period................... $13.22 $14.34
====== ======
TOTAL RETURN(D): ................................ 1.10% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $ 284 $ 5
Average net assets (000)......................... $ 118 $ 1
Ratios to average net assets:
Expenses, including distribution fees........... 2.03% 2.06%(c)
Expenses, excluding distribution fees........... 1.03% 1.06%(c)
Net investment income........................... 2.04% 1.94%(c)
Portfolio turnover rate.......................... 256% 50%
</TABLE>
- -----------
(a) Commencement of offering of Class C shares of Prudential Active Balanced
Fund, a series of Prudential Dryden Fund, whose assets and liabilities
were acquired by the Fund, Class C shares for Class C shares, on January
23, 1998. Immediately prior to this transfer, the Fund had no assets. The
Fund is the accounting survivor to Prudential Active Balanced Fund and, as
such, financial data is shown from November 7, 1996.
(b) Calculated based upon weighted average shares outstanding during the year.
(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.
8
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS Z SHARES)
The following financial highlights for the two years ended September 30,
1998 have been audited by PricewaterhouseCoopers LLP, independent accountants,
and for the years ended September 30, 1996 and for the period from January 4,
1993 through September 30, 1993 have been audited by other independent
auditors, whose reports thereon were unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class Z share outstanding, total return, ratios to
average net assets and other supplemental data for the periods indicated.
Further performance information is contained in the annual report, which may
be obtained without charge. See "Shareholder Guide--Shareholder Services--
Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
-------------------------------------------------------------------------
JANUARY 4,
1993(A)
YEAR ENDED SEPTEMBER 30, THROUGH
------------------------------------------------------- SEPTEMBER 30,
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 14.45 $ 13.01 $ 12.46 $ 10.92 $ 11.05 $10.00
-------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... .38 .39(e) .29(b) .33(b) .24(b) .21(b)
Net realized and
unrealized gain (loss)
on investment
transactions............ (.12) 2.22 .81 1.54 (.12) .84
-------- -------- -------- -------- ------- -------
Total from investment
operations............. .26 2.61 1.10 1.87 .12 1.05
-------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income....... (.35) (.39) (.37) (.29) (.14) --
Dividends from net
realized income......... (1.04) (.78) (.18) (.04) (.11) --
-------- -------- -------- -------- ------- -------
Total distributions..... (1.39) (1.17) (.55) (.33) (.25) --
-------- -------- -------- -------- ------- -------
Net asset value, end of
period.................. $ 13.32 $ 14.45 $ 13.01 $ 12.46 $ 10.92 $ 11.05
======== ======== ======== ======== ======= =======
TOTAL RETURN(D): ........ 2.12% 21.34% 9.11% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $161,838 $158,672 $153,588 $133,352 $81,176 $38,786
Average net assets (000). $177,443 $154,199 $142,026 $104,821 $58,992 $12,815
Ratios to average net
assets:
Expenses, including
distribution fees...... 1.03% 1.06% 1.00%(b) 1.00%(b) 1.00%(b) 1.00%(b)(c)
Expenses, excluding
distribution fees...... 1.03% 1.06% 1.00%(b) 1.00%(b) 1.00%(b) 1.00%(b)(c)
Net investment income... 2.99% 2.94% 3.09%(b) 3.53%(b) 3.06%(b) 2.68%(b)(c)
Portfolio turnover rate.. 256% 50% 51% 30% 40% 47%
</TABLE>
- -----------
(a) Commencement of investment operations of Prudential Active Balanced Fund,
a series of Prudential Dryden Fund, whose assets and liabilities were
acquired by the Fund, Class Z shares for Class Z shares, on January 23,
1998. Immediately prior to this transfer, the Fund had no assets. The Fund
is the accounting survivor to Prudential Active Balanced Fund and, as
such, financial data is shown from January 4, 1993.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return 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 other 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) Calculated based upon weighted average shares outstanding during the year.
9
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK INCOME AND LONG-TERM GROWTH OF
CAPITAL BY INVESTING IN A PORTFOLIO OF EQUITY, FIXED-INCOME AND MONEY MARKET
SECURITIES WHICH IS ACTIVELY MANAGED TO CAPITALIZE ON OPPORTUNITIES CREATED BY
PERCEIVED MISVALUATION. THERE CAN BE NO ASSURANCE THAT THE FUND'S OBJECTIVE
WILL BE ACHIEVED. See "Investment Objectives and Policies" in the Statement of
Additional Information.
PI, the investment adviser to the Fund, uses the following ranges as the
normal operating parameters for the securities to be purchased by the Fund:
(i) 40-75% of the total assets of the Fund will be invested in common stocks,
preferred stocks and other equity-related securities; (ii) 25-60% of the total
assets of the Fund will be invested in investment grade fixed-income
securities; and (iii) 0-35% of the total assets of the Fund will be invested
in money market instruments. At least 25% of the Fund's total assets will be
invested in fixed-income senior securities.
The Fund's investments will be actively shifted among these asset classes in
order to capitalize on valuation opportunities and to maximize the Fund's
total investment return. The equity component of the Fund will be invested in
the common stocks, preferred stocks and other equity-related securities of
companies that are expected to generate superior earnings growth or are
attractively valued. The fixed-income component of the Fund will be invested
primarily in fixed-income securities rated Baa or better by Moody's Investors
Service, Inc. (Moody's) or BBB or better by Standard & Poor's Ratings Group
(S&P) (or the equivalent rating of another nationally recognized statistical
rating organization (NRSRO)) or, if not rated, determined by the investment
adviser to be of comparable quality to securities so rated. However, the Fund
also may invest up to 20% of the fixed-income portion of its portfolio in
securities rated lower than Baa/BBB (or the equivalent rating of another
NRSRO) or, if not rated, determined by the investment adviser to be of
comparable quality to securities so rated. The weighted average maturity of
the fixed-income component of the Fund will normally be between 3 and 30
years.
Under normal market conditions, at least 65% of the value of the Fund's
total assets will be invested according to the above allocations. Within these
allocations, the Fund's assets may be invested as follows: (i) up to 15% of
the Fund's total assets, in common stocks, preferred stocks and other equity-
related securities of foreign issuers; (ii) up to 20% of the Fund's total
assets, in investment grade fixed-income securities of foreign issuers; (iii)
in mortgage-backed securities; (iv) in custodial receipts and asset-backed
securities; and (v) in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities.
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement, the Fund may:
(i) enter into repurchase agreements, when-issued, delayed delivery and
forward commitment transactions; (ii) lend its portfolio securities; (iii)
purchase and sell put and call options on securities, stock indices and
interest rate indices; (iv) purchase and sell futures contracts on stock
indices and interest rate indices and options thereon; and (v) purchase and
sell futures contracts on securities. If the Fund enters into a large number
of futures contracts to hedge its portfolio, the collateral required to be
segregated therefor may exceed 35% of the Fund's total assets.
The Fund also may: (i) purchase and sell currency spot contracts; (ii)
purchase and sell currency futures contracts and foreign currency forward
contracts; and (iii) purchase and sell put and call options on currencies and
on foreign currency futures contracts, in each case to attempt to reduce risks
associated with currency fluctuations.
10
<PAGE>
The Fund reserves the right as a defensive measure to hold temporarily other
types of securities without limit, including high quality commercial paper,
bankers' acceptances, non-convertible debt securities (corporate and
government) or government and high quality money market securities of U.S. and
non-U.S. issuers, or cash (foreign currencies or U.S. dollars), in such
proportions as, in the opinion of the investment adviser, prevailing market,
economic or political conditions warrant. The Fund also may temporarily hold
cash and invest in high quality foreign or domestic money market instruments
pending investment of proceeds from new sales of Fund shares or to meet
ordinary daily cash needs. See "Other Investments and Policies" below.
As with an investment in any mutual fund, an investment in the Fund can
decrease in value and you can lose money.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (INVESTMENT COMPANY ACT). INVESTMENT POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S. Treasury
or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the issuing agency. See
"Investment Objectives and Policies--U.S. Government Securities" in the
Statement of Additional Information.
MORTGAGE-BACKED SECURITIES.The Fund may invest in mortgage-backed securities
and other derivative mortgage products, including those representing an
undivided ownership interest in a pool of mortgages, e.g., Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC) certificates where the U.S.
Government or its agencies or instrumentalities guarantees the payment of
interest and principal of these securities. These guarantees do not extend to
the securities' yield or value, which are likely to vary inversely with
fluctuations in interest rates, nor do these guarantees extend to the yield or
value of the Fund's shares. See "Investment Objectives and Policies--U.S.
Government Securities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees.
Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a
period of rising interest rates. Accordingly, amounts available for
reinvestment by the Fund are likely to be greater during a period of declining
interest rates and, as a result, likely to be reinvested at lower interest
rates than during a period of rising interest rates. Mortgage-backed
securities may decrease in value as a result of increases in interest rates
and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment.
The Fund also may invest in mortgage-backed security strips (MBS strips)
issued by the U.S. Government or its agencies or instrumentalities. MBS strips
are usually structured with two classes that receive different proportions of
the interest and principal distributions on a pool of mortgage assets. A
common type of stripped mortgage security will have one class receiving some
of the interest and most of the principal from the mortgage assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the expected or anticipated rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and principal payments may have a material effect on yield to
maturity. If the
11
<PAGE>
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Fund may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially adversely
affected.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Fund may purchase collateralized mortgage obligations (CMOs) issued by
agencies or instrumentalities of the U.S. Government. The Fund also may
purchase CMOs issued by private originators of, or investors in, mortgage
loans, including depository institutions, mortgage banks, investment banks and
special-purpose subsidiaries of the foregoing. A CMO is backed by a portfolio
of mortgages or mortgage-backed securities. The issuer's obligation to make
interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed securities. The issuer of a series of CMOs may
elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All
future references to CMOs include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the underlying mortgage assets may be allocated among the several classes of a
CMO series in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a
more predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities.
In reliance on rules and interpretations of the Securities and Exchange
Commission (Commission), the Fund's investments in certain qualifying CMOs and
REMICs are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objectives and
Policies--Mortgage-Related Securities" in the Statement of Additional
Information.
ASSET-BACKED SECURITIES
The Fund may purchase asset-backed securities that represent either
fractional interests or participations in pools of leases, retail installment
loans, or revolving credit receivables held by a trust or limited purpose
finance subsidiary. Such asset-backed securities may be secured by the
underlying assets (such as certificates for automobile receivables) or may be
unsecured (such as credit card receivable securities). Depending on the
structure of the asset-backed security, monthly or quarterly payments of
principal and interest or interest only are passed-through or paid through to
certificate holders. Asset-backed securities may be guaranteed up to certain
amounts by guarantees, insurance, or letters of credit issued by a financial
institution affiliated or unaffiliated with the originator of the pool.
Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage pass-
through securities), which may shorten the securities' weighted average life
and reduce their overall return to certificate holders. On the other hand,
asset-backed securities may present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities often do not have the
benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of
which may reduce the ability to obtain full payment. In the case of automobile
receivables, the security interests in the underlying automobiles are often
not transferred when the pool is created, with the resulting possibility that
the collateral could be resold.
12
<PAGE>
Unlike traditional fixed-income securities, interest and principal payments
on asset-backed securities are made more frequently, usually monthly, and
principal may be prepaid at any time. As a result, if the Fund purchases such
a security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively,
if the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce
yield to maturity. Certificate holders may also experience delays in payment
if the full amounts due on underlying loans, leases or receivables are not
realized because of unanticipated legal or administrative costs of enforcing
the contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. If consistent with
its investment objective and policies, the Fund may invest in other asset-
backed securities that may be developed in the future.
TYPES OF CREDIT ENHANCEMENT. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations
of a number of different parties. To lessen the effect of failures by obligors
on underlying assets to make payments, those securities may contain elements
of credit support, which fall into two categories: (i) liquidity protection
and (ii) protection against losses resulting from ultimate default by an
obligor on the underlying assets. Liquidity protection refers to the provision
of advances, generally by the entity administering the pool of assets, to
ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool.
This protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. The Fund will not pay any fees for credit support,
although the existence of credit support may increase the price of a security.
LIQUIDITY PUTS
The Fund may purchase instruments together with the right to resell the
instruments at an agreed-upon price or yield, within a specified period prior
to the maturity date of the instruments. This instrument is commonly known as
a "liquidity put" or a "tender option bond."
CORPORATE AND OTHER DEBT OBLIGATIONS
The Fund may invest in investment grade corporate and other debt obligations
of domestic and foreign issuers, including convertible securities and money
market instruments. Bonds and other debt securities are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and must repay the amount borrowed at maturity. Investment
grade debt securities are rated within the four highest quality grades as
determined by Moody's (currently Aaa, Aa, A and Baa for bonds) or S&P
(currently AAA, AA, A and BBB for bonds), or comparably rated by another NRSRO
or in unrated securities which are of equivalent quality in the opinion of the
investment adviser. Securities rated Baa by Moody's, although considered to be
investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. Such lower
rated securities are subject to a greater risk of loss of principal and
interest.
NON-INVESTMENT GRADE FIXED-INCOME SECURITIES. Up to 20% of the fixed-income
portion of the Fund's portfolio may be invested in non-investment grade fixed-
income securities. Non-investment grade fixed-income securities (those rated
below Baa by Moody's or BBB by S&P or comparably rated by another NRSRO or
unrated securities determined by the investment adviser to be of comparable
quality) have speculative characteristics (including the possibility of
default or bankruptcy of the issuers of such securities, market price
volatility based upon interest rate sensitivity, questionable creditworthiness
and relative liquidity of the secondary trading market). Because these
securities have been found to be more sensitive to adverse economic changes or
individual corporate developments and less sensitive to interest rate changes
than
13
<PAGE>
higher-rated investments, an economic downturn could disrupt the market for
these securities and adversely affect the value of these securities and the
ability of issuers to repay principal and interest. The Fund will not invest
in securities rated lower than B by Moody's or S&P or comparably rated by
another NRSRO. These securities possess risk that the obligation may not be
paid when due. See "Risk Factors Relating to Investing in Debt Securities
Rated Below Investment Grade (Junk Bonds)" below.
EQUITY-RELATED SECURITIES. The Fund may invest in equity-related securities.
Equity-related securities include common stocks, preferred stocks, securities
convertible or exchangeable for common stocks or preferred stocks, equity
investments in partnerships, joint ventures and other forms of non-corporate
investments, American Depositary Receipts (ADRs) and American Depositary
Shares (ADSs), and warrants and rights exercisable for equity securities. See
"Convertible Securities, Warrants and Rights" below.
ADRs and ADSs are U.S. dollar-denominated certificates or shares issued by a
U.S. bank or trust company and represent the right to receive securities of a
foreign issuer deposited in a domestic bank or foreign branch of a U.S. bank
and traded on a U.S. exchange or in an over-the-counter market. Generally,
ADRs and ADSs are in registered form. There are no fees imposed on the
purchase or sale of ADRs or ADSs when purchased from the issuing bank or trust
company in the initial underwriting, although the issuing bank or trust
company may impose charges for the collection of dividends and the conversion
of ADRs or ADSs into the underlying securities. Investment in ADRs and ADSs
has certain advantages over direct investment in the underlying foreign
securities since: (i) ADRs and ADSs are U.S. dollar-denominated investments
that are registered domestically, easily transferable, and for which market
quotations are readily available; and (ii) issuers whose securities are
represented by ADRs or ADSs are usually subject to comparable auditing,
accounting and financial reporting standards as domestic issuers.
CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS
A CONVERTIBLE SECURITY IS A BOND, DEBENTURE, CORPORATE NOTE, PREFERRED STOCK
OR OTHER SIMILAR SECURITY THAT MAY BE CONVERTED AT A STATED PRICE WITHIN A
SPECIFIED PERIOD OF TIME INTO A CERTAIN QUANTITY OF THE COMMON STOCK OR OTHER
EQUITY SECURITIES OF THE SAME OR A DIFFERENT ISSUER. A warrant or right
entitles the holder to purchase equity securities at a specific price for a
specific period of time. Convertible securities are senior to common stocks in
a corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation dependent upon a market price advance
in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
In recent years, convertible securities have been developed which combine
higher or lower current income with options and other features. The Fund may
invest in these types of convertible securities.
The Fund may invest in convertible securities which are rated below
investment grade or in unrated securities of comparable quality. See "Risk
Factors Relating to Investing in Debt Securities Rated Below Investment Grade
(Junk Bonds)" below.
14
<PAGE>
FORWARD ROLLS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Fund may commit up to 30% of the value of its total assets to investment
techniques such as dollar rolls, forward rolls and reverse repurchase
agreements. A forward roll is a transaction in which the Fund sells a security
to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase the same or similar security from the
institution at a later date at an agreed upon price. With respect to mortgage-
related securities, such transactions are often called "dollar rolls." In
dollar roll transactions, the mortgage-related securities that are repurchased
will bear the same coupon rate as those sold, but generally will be
collateralized by different pools of mortgages with different prepayment
histories than those sold. During the roll period, the Fund forgoes principal
and interest paid on the securities and is compensated by the difference
between the current sales price and the forward price for the future purchase
as well as by interest earned on the cash proceeds of the initial sale. A
"covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures
on or before the forward settlement date of the dollar roll transaction.
Reverse repurchase agreements involve sales by the Fund of portfolio
securities to a financial institution concurrently with an agreement by the
Fund to repurchase the same securities at a later date at a fixed price.
During the reverse repurchase agreement period, the Fund continues to receive
principal and interest payments on these securities.
Reverse repurchase agreements, forward rolls and dollar rolls involve the
risk that the market value of the securities purchased by the Fund with the
proceeds of the initial sale may decline below the price of the securities the
Fund has sold but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement, forward roll or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligations to repurchase the securities. The staff of the Commission has
taken the position that reverse repurchase agreements, forward rolls and
dollar rolls are to be treated as borrowings. The Company expects that under
normal conditions most of the borrowings of the Fund will consist of such
investment techniques rather than bank borrowings. See "Other Investments and
Policies--Borrowing" below.
CUSTODIAL RECEIPTS
The Fund may acquire custodial receipts or certificates, such as CATS, TIGRs
and FICO Strips, underwritten by securities dealers or banks, that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies or
instrumentalities. The underwriters of these certificates or receipts
generally purchase a U.S. Government security and deposit the security in an
irrevocable trust or custodial account with a custodian bank, which then
issues receipts or certificates that evidence ownership of the periodic
unmatured coupon payments and the final principal payment on the U.S.
Government security. Custodial receipts evidencing specific coupon or
principal payments have the same general attributes as zero coupon U.S.
Government securities but are not U.S. Government securities and are neither
insured nor guaranteed by the U.S. Government.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest a portion of its assets in equity securities and fixed-
income securities of foreign issuers (denominated in either U.S. or foreign
currency). ADRs and ADSs (both of which are U.S. dollar-denominated
certificates issued by a U.S. bank or trust company that represent the right
to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. bank) are not included in any limitation on
investment in foreign securities.
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic
and
15
<PAGE>
foreign banks, and obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities. These obligations will be U.S. dollar
denominated or denominated in a foreign currency. Money market instruments
typically have a maturity of one year or less as measured from the date of
purchase. The Fund may invest in money market instruments without limit for
temporary defensive and cash management purposes. To the extent the Fund
otherwise invests in money market instruments, it is subject to the
limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
The Fund may borrow up to 30% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund also may borrow
through forward rolls, dollar rolls or reverse repurchase agreements and to
take advantage of investment opportunities. The Fund may pledge up to 30% of
its total assets to secure these borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. If the 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 Fund's shares to rise faster than would otherwise
be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to the Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is
the speculative characteristic known as "leverage." See "Investment Objectives
and Policies--Borrowing" in the Statement of Additional Information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss. The Fund may participate in a joint
repurchase account managed by PI. See "Investment Objectives and Policies--
Repurchase Agreements" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and privately placed commercial paper that have a
readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors. The
Fund's investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is not expected to exceed 200%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information. In addition, high portfolio turnover may result in
increased short-term capital gains which, when distributed to shareholders,
are treated as ordinary income. See "Taxes, Dividends and Distributions."
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and/or yield to the Fund at the time of
entering into the transaction. While the Fund will only purchase securities on
a when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record
the transaction and thereafter reflect the value, each day, of such security
in determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Fund's
Custodian will segregate cash or other liquid assets having a value equal to
or greater than the Fund's purchase commitments. Subject to this requirement,
the Fund may purchase securities on such basis without limit. See "Investment
Objectives and Policies--When-Issued and Delayed Delivery Securities" in the
Statement of Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral (which may
include a secured letter of credit) in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which is
segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. As a matter
of fundamental policy, the Fund may not lend more than 30% of the value of its
total assets. See "Investment Objectives and Policies--Lending of Securities"
in the Statement of Additional Information. The Fund may pay reasonable
administration and custodial fees in connection with a loan.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales "against-the-box." A short sale is against-
the-box when the Fund enters into a short sale of a security which the Fund
owns or has the right to obtain at no added cost. No more than 25% of the
Fund's net assets (determined at the time of the short sale against-the-box)
may be subject to such sales.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBLE IMPOSITION OF EXCHANGE
CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may be subject
to greater fluctuations in price than securities issued by U.S. corporations
or issued or guaranteed by the U.S. Government, its instrumentalities or
agencies. In addition, there may be less publicly available information about
a foreign company than about a domestic company. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic companies. There is
generally less government regulation of securities exchanges, brokers and
listed companies abroad than in the United States and there is a possibility
of expropriation, confiscatory taxation or diplomatic developments which could
affect investment.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are
generally higher than U.S. brokerage commissions. Increased custodian costs as
well as
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administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred. The Fund may, but need not, enter into forward foreign currency
exchange contracts, options on foreign currencies and futures contracts on
foreign currencies and related options, for hedging purposes, including:
locking-in the U.S. dollar price of the purchase or sale of securities
denominated in a foreign currency; locking-in the U.S. dollar equivalent of
dividends to be paid on such securities which are held by the Fund; and
protecting the U.S. dollar value of such securities which are held by the
Fund.
SHAREHOLDERS SHOULD BE AWARE THAT INVESTING IN THE EQUITY MARKETS OF
DEVELOPING COUNTRIES INVOLVES EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS
DIVERSE AND MATURE, AND TO POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE
LESS STABILITY, THAN THOSE OF DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE
INDICATES THAT THE MARKETS OF DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE
THAN THE MARKETS OF DEVELOPED COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS
IN FOREIGN SECURITIES, DESCRIBED ABOVE, MAY BE GREATER WITH RESPECT TO
INVESTMENTS IN DEVELOPING COUNTRIES.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)
The Fund may invest up to 20% of the fixed-income portion of its portfolio
in non-investment grade debt securities or in unrated securities of comparable
quality. Fixed-income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations (credit
risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). Lower rated or unrated
(i.e., high yield or high risk) securities (commonly referred to as junk
bonds) are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates. The investment adviser considers both
credit risk and market risk in making investment decisions for the Fund.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities and, from
time to time, it may be more difficult to value high yield securities than
more highly rated securities. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer. As a
result, the investment adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating the Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for
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investors. If the Fund experiences unexpected net redemptions, it may be
forced to sell its higher rated securities, resulting in a decline in the
overall credit quality of the debt portion of its portfolio and increasing the
exposure of the Fund to the risks of high yield securities.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY IF THE FUND
IS UNSUCCESSFUL IN ITS USE OF THESE STRATEGIES. These strategies currently
include the use of options, forward currency exchange contracts and futures
contracts and options thereon. The Fund's ability to use these strategies may
be limited by market conditions, regulatory limits and tax considerations and
there can be no assurance that any of these strategies will succeed. See
"Investment Objectives and Policies" and "Taxes, Dividends and Distributions"
in the Statement of Additional Information. The investment adviser does not
intend to buy all of these instruments or use all of these strategies to the
full extent permitted unless it believes that doing so will help the Fund
achieve its objectives. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objectives and
policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON EQUITY
SECURITIES, STOCK INDICES (E.G., S&P 500) AND FOREIGN CURRENCIES THAT ARE
TRADED ON U.S. OR FOREIGN SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER
(OTC) MARKET TO ENHANCE RETURN OR TO HEDGE ITS PORTFOLIO. The Fund may write
put and call options to generate additional income through the receipt of
premiums, purchase put options in an effort to protect the value of securities
(or currencies) that it owns against a decline in market value and purchase
call options in an effort to protect against an increase in the price of
securities (or currencies) it intends to purchase. The Fund may also purchase
put and call options to offset previously written put and call options of the
same series. See "Investment Objectives and Policies--Options on Securities"
in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY SUBJECT
TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The
writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities
or currency in excess of the exercise price of the option during the period
that the option is open. The Fund will write only "covered" call options for
which it (i) owns an offsetting position in the underlying security or
currency or (ii) segregates cash or other liquid assets with a value
sufficient at all times to cover its obligations. Under the first
circumstance, the Fund's losses are limited because it owns the underlying
position; under the second circumstance, the Fund's losses are potentially
unlimited.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
The Fund will write only put options for which it (i) owns an offsetting
position in the underlying security or currency or (ii) segregates cash or
other liquid assets with a value sufficient at all times to cover its
obligations.
FOREIGN CURRENCY FORWARD CONTRACTS
THE FUND MAY ENTER INTO FOREIGN CURRENCY FORWARD CONTRACTS TO PROTECT THE
VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY EXCHANGE
RATES. The Fund also may purchase and sell foreign currency forward contracts,
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futures contracts on foreign currency, and options on futures contracts on
foreign currency to protect against the effect of adverse changes in foreign
currencies. The Fund may enter into such contracts on a spot, i.e., cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. THE FUND MAY
NOT USE FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES, FUTURES CONTRACTS ON
FOREIGN CURRENCIES AND OPTIONS ON SUCH CONTRACTS IN ORDER TO GENERATE INCOME,
ALTHOUGH THE USE OF SUCH CONTRACTS MAY INCIDENTALLY GENERATE INCOME.
Transaction hedging is the purchase or sale of a forward contract with respect
to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities and accruals
of interest or dividends receivable and Fund expenses. Position hedging is the
sale of a foreign currency with respect to portfolio security positions
denominated or quoted in that currency or in a different currency (cross
hedge). Although there are no limits on the number of forward contracts which
the Fund may enter into, the Fund may not position hedge (including cross
hedges) with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of foreign
currency) of the securities being hedged. See "Investment Objectives and
Policies--Risks Related to Foreign Currency Forward Contracts" in the
Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(CFTC). THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. The Fund may purchase and sell futures
contracts on securities, securities indices, interest rate indices and foreign
currencies. A futures contract is an agreement to purchase or sell an agreed
amount of securities or currencies at a set price for delivery in the future.
A stock index futures contract is an agreement to purchase or sell cash equal
to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. The Fund may purchase and sell futures
contracts or related options as a hedge against changes in market conditions.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the market value
of the Fund's total assets. The Fund may purchase and sell futures contracts
and related options, without limitation, for bona fide hedging purposes in
accordance with regulations of the CFTC (i.e., to reduce certain risks of its
investments). The total contract value of all futures contracts sold will not
exceed the total market value of the Fund's investments.
Futures contracts and related options are generally subject to segregation
requirements of the Commission and coverage requirements of the CFTC. If the
Fund does not hold the security or currency underlying the futures contract,
it will be required to segregate on an ongoing basis with its Custodian cash
or other liquid assets having an amount at least equal to its obligations with
respect to such futures contracts. The Fund may place and maintain cash,
securities and similar investments with a futures commission merchant in
amounts necessary to effect the Fund's transactions in exchange-traded futures
contracts and options thereon, provided certain conditions are satisfied.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies underlying the futures contract is
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imperfect and there is a risk that the value of the securities or currencies
underlying the futures contract may increase or decrease at a greater rate
than the related futures contracts resulting in losses to the Fund. Certain
futures exchanges or boards of trade have established daily limits on the
amount that the price of futures contracts or related options may vary, either
up or down, from the previous day's settlement price. These daily limits may
restrict the Fund's ability to purchase or sell certain futures contracts or
related options on any particular day.
The Fund's ability to enter into or close out futures contracts and options
thereon is limited by the requirements of the Internal Revenue Code of 1986,
as amended (the Internal Revenue Code) for qualification as a regulated
investment company. See "Taxes, Dividends and Distributions" in the Statement
of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS
ITS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency or interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, foreign currency and futures contracts and options on futures
contracts include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices
of the securities or currencies being hedged; (3) the fact that skills needed
to use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the risk that the counterparty may be
unable to complete the transaction; and (6) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate liquid assets in connection with hedging
transactions. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if management believes that the
other party to the options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will
continue to exist or that the other party will continue to make a market.
Thus, it may not be possible to close out an option or futures transaction.
The inability to close out options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with whom the Fund has an open position in an
option, a futures contract or related option.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like their
investment objectives, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE COMPANY HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
For the fiscal year ended September 30, 1998, total expenses as percentage
of average net assets were 1.28%, 2.03%, 2.03% and 1.03% of the Class A, Class
B, Class C and Class Z shares, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE
MANAGER OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF
.65 OF 1% OF THE FUND'S AVERAGE NET ASSETS. PIFM is organized in New York as a
limited liability company. For the fiscal year ended September 30, 1998, the
Fund (including its predecessor, Prudential Active Balanced Fund, a series of
Prudential Dryden Fund) paid management fees to PIFM of .65 of 1% of the
Fund's average net assets. See "Manager and Subadvisers" in the Statement of
Additional Information.
As of October 31, 1998, PIFM served as the manager to 67 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $68.2 billion.
Under the Management Agreement with the Company, PIFM manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager and Subadvisers" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE
SUBADVISER OR THE INVESTMENT ADVISER), THE SUBADVISER FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS
REIMBURSED BY PIFM FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING
SUCH SERVICES. PIC's address is Prudential Plaza, Newark, New Jersey 07102-
3777. Under the Management Agreement, PIFM continues to have responsibility
for all investment advisory services and supervises the Subadviser's
performance of such services.
JAMES SCOTT AND MARK STUMPP ARE THE PORTFOLIO MANAGERS OF THE FUND AND OF
ITS UNDERLYING EQUITY PORTFOLIO. MARTIN LAWLOR IS THE MANAGER OF THE FUND'S
UNDERLYING BOND PORTFOLIO. Each has served as such since June 1, 1998. Mr.
Scott is a Senior Managing Director of Prudential Investments Quantitative
Investment Management, a unit of PI (PIQIM). Mr. Scott has managed balanced
and equity portfolios for pension plans of The Prudential Insurance Company of
America (Prudential) and several institutional clients since 1987 and prior to
that was a Professor and Divisional Coordinator for Finance at Columbia
University Graduate School of Business. Mr. Stumpp also is a Senior Managing
Director of PIQIM as well as chairman of its Investment Policy Committee. Mr.
Stumpp's responsibilities with PIQIM include: managing PIQIM's model
portfolio, overseeing research on asset allocation, security valuation and
portfolio optimization, developing tactical asset allocation algorithms, and
developing and managing the methodology underlying PIQIM's actively managed
equity portfolios. Mr. Lawlor is a Managing Director of PI and joined
Prudential in 1976. He is responsible for the day-to-day management of the
fixed-income portion of the Fund's portfolio. Mr. Lawlor, whose experience
includes managing over $9 billion in publicly traded fixed-income assets of
general accounts, has been responsible for Prudential's institutional U.S.
fixed-income trading since 1994.
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PIFM and PIC are wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE
FUND. IT IS A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities
Incorporated (Prudential Securities), One Seaport Plaza, New York, New York
10292, previously served as the distributor of the Fund's shares. It is an
indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING
THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs
the expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Fund. These
expenses include commissions and account servicing fees paid to, or on account
of, Dealers or financial institutions which have entered into agreements with
the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of the
Distributor associated with the sale of the Fund's shares, including lease,
utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the
distribution, marketing, administrative and other services and activities
provided by Dealers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has
voluntarily limited 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. This
voluntary waiver may be terminated at any time without notice.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES AT AN
ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B AND
CLASS C SHARES. The Class B and Class C Plans provide for the payment to the
Distributor of (i) an asset-based sales charge of .75 of 1% of the average
daily net assets of the Class B and Class C shares, respectively, and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class
B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges."
For the fiscal year ended September 30, 1998, the Fund paid distribution
expenses of .25%, 1.00% and 1.00% of the average daily net assets of the Class
A, Class B and Class C shares, respectively. The Fund records all payments
made under the Plans as expenses in the calculation of net investment income.
See "Distributor" in the Statement of Additional Information.
23
<PAGE>
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund will be allocated to each such class of the Fund based
upon the ratio of sales of each such class to the sales of Class A, Class B or
Class C shares of the Fund other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Company, including a
majority of the Directors who are not "interested persons" of the Company (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of the Fund. The Fund will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to Dealers and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons
or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has waived a portion of its distribution fee for the Class A
shares as described above under "Distributor." Fee waivers and expense
subsidies will increase the Fund's total return. These voluntary waivers may
be terminated at any time without notice. See "Performance Information" in the
Statement of Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Company. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent for the
Fund and in those capacities maintains certain books and records for the
Company. PMFS is a wholly-owned subsidiary of PIFM. Its mailing address is
P.O. Box 15005, New Brunswick, New Jersey 08906-5005.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and
24
<PAGE>
dividends, pricing and account services. Although, at this time, there can be
no assurance that there will be no adverse impact on the Fund, the Manager,
the Distributor, the Transfer Agent and the Custodian have advised the Fund
that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000 and expect that their systems, and those
of outside service providers, will be adapted in time for that event.
Additionally, issuers of securities generally as well as those purchased by
the Fund may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of securities held
by the Fund.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Company's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect its
NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distribution and/or service
fees. It is expected, however, that the NAV of the four classes will tend to
converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of distribution and/or service fee expense
accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL
RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The total return shows how much an
investment in the Fund would have increased (decreased) over a specified
period of time (i.e., one, five, or ten years or since inception of the Fund)
assuming that all distributions and dividends by the Fund were reinvested on
the reinvestment dates during the period and less all recurring fees. The
aggregate total return reflects actual performance over a stated period of
time. Average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. Average annual total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average
annual total return nor aggregate total return takes into account any federal
or state income taxes which may be payable upon redemption. The yield refers
to the income generated by an investment in the Fund over a
25
<PAGE>
one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing
the Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., and other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information will be contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON NET INVESTMENT INCOME AND
NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked-
to-market" for federal income tax purposes; that is, treated as having been
sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency fluctuation
losses exceed other investment company taxable income during a taxable year,
distributions made by the Fund during the year would be characterized as a
return of capital to shareholders, reducing the shareholder's basis in his or
her Fund shares.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term capital gains (i.e., the excess of net short-term capital gains
over net long-term capital losses) distributed to shareholders will be taxable
as ordinary income to the shareholder whether or not reinvested. Any net
capital gains (i.e., the excess of net long-term capital gains over net short-
term capital losses) distributed to shareholders will be taxable as long-term
capital gains to the shareholder, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
federal long-term capital gains rate for individual shareholders is 20% and
the maximum statutory federal tax rate for ordinary income is 39.6%. The
maximum statutory federal long-term capital gains rate and the maximum
statutory federal tax rate for ordinary income for corporate shareholders
currently is 35%.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are
declared. This rule applies to dividends declared by the Fund in October,
November or December of a calendar year, payable to shareholders of record on
a date in any such month, if such dividends are paid during January of the
following calendar year.
26
<PAGE>
Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign corporations, interest income, capital and currency
gain, gain or loss from Section 1256 contracts and income from certain other
sources will not be eligible for the corporate dividends-received deduction.
See "Taxes, Dividends and Distributions" in the Statement of Additional
Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends-received deduction.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, will be treated as a
long-term capital loss to the extent of any capital gain distributions
received by the shareholder. With respect to non-corporate shareholders, gain
or loss on shares held more than one year will be considered in determining a
holder's adjusted net capital gain subject to a maximum statutory tax rate of
20%.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds payable on the accounts of certain shareholders who fail to furnish
their correct tax identification numbers to the IRS on Form W-9 (or IRS Form
W-8 in the case of certain foreign shareholders) with the required
certifications regarding the shareholder's status under the federal income tax
law. Withholding at this rate is also required from dividends and capital
gains distributions (but not redemption proceeds) payable to shareholders who
are otherwise subject to backup withholding. Dividends of net investment
income and short-term gains paid to a foreign shareholder will generally be
subject to U.S. withholding tax at the rate of 30% (or lower treaty rate).
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY,
ANNUALLY, AND TO MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET
LONG-TERM CAPITAL LOSSES AT LEAST ANNUALLY. Dividends paid by the Fund with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class other than Class Z will bear its own
distribution and/or service fee charges, generally resulting in lower
dividends for Class B and Class C shares in relation to Class A and Class Z
shares and lower dividends for Class A shares in relation to Class Z shares.
Distribution of net capital gains, if any, will be paid in the same amount per
share for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE FUND,
BASED ON THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE
BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT
LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH
DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services LLC, Attn: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. The Fund will notify its
shareholders after the close of the Fund's taxable year both of the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF THE FUND.
27
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE COMPANY WAS INCORPORATED IN MARYLAND ON AUGUST 10, 1995. THE COMPANY IS
AUTHORIZED TO ISSUE 3 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, DIVIDED INTO THREE SERIES OR PORTFOLIOS, THE FUND, PRUDENTIAL JENNISON
GROWTH FUND AND PRUDENTIAL JENNISON GROWTH & INCOME FUND. EACH SERIES IS
FURTHER DIVIDED INTO FOUR CLASSES OF SHARES, 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 THE COMPANY. Each class of
common stock of the Fund represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (ii) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to
its arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (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 Company's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series of common stock and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board may determine.
The Company's expenses generally are allocated among its three series on the
basis of relative net assets at the time of allocation, except that expenses
directly attributable to a series are charged to that series.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares (with the exception of
Class Z shares, which are not subject to any distribution or service fees).
Except for the conversion feature applicable to the Class B shares, there are
no conversion, preemptive or other subscription rights. In the event of
liquidation, each share of common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debts and expenses of the Fund have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of
those classes are likely to be lower than to Class A shareholders and to Class
Z shareholders, whose shares are not subject to any distribution and/or
service fees. The Company's shares do not have cumulative voting rights for
the election of Directors.
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE COMPANY WILL NOT BE REQUIRED TO HOLD MEETINGS
OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO
BE ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS
HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10%
OR MORE OF THE COMPANY'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE
REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Company with the
Commission under the Securities Act. Copies of the Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
28
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUSEC, OR DIRECTLY FROM THE FUND
THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE
TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW
BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs sponsored by
Prudential Retirement Services should contact their client representative for
more information about Class Z shares. The purchase price is the NAV next
determined following receipt of an order in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Distributor, your Dealer or the Transfer Agent plus a sales
charge which, at your option, may be imposed either (i) at the time of
purchase (Class A or Class C shares) or (ii) on a deferred basis (Class B or
Class C shares). Class Z shares are offered to a limited group of investors at
net asset value without any sales charge. Payment may be made by wire, check
or through your brokerage account. See "Alternative Purchase Plan" below. See
also "How the Fund Values its Shares."
The minimum initial investment for the Fund is $1,000 for Class A and Class
B shares and $2,500 for Class C shares, except that the minimum initial
investment for Class C shares may be waived from time to time. There is no
minimum initial investment requirement for Class Z shares. The minimum
subsequent investment is $100 for all classes, except for Class Z shares, for
which there is no such minimum. All minimum investment requirements are waived
for certain retirement and employee savings plans or custodial accounts for
the benefit of minors. For purchases through the Automatic Investment Plan,
the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
Application forms can be obtained from the Transfer Agent, the Distributor
or your Dealer. If a stock certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares.
Shareholders who hold their shares through Prudential Securities will not
receive stock certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your Dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Dealers may charge their customers a separate fee for processing purchases
and redemptions. In addition, transactions in shares of the Fund may be
subject to postage and handling charges imposed by your Dealer. Any such
charges are retained by the Dealer and are not remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS to receive an account number
at (800) 225-1852 (toll-free). The following information will be requested:
your name, address, tax identification number, class election, dividend
distribution election, amount being wired and wiring bank. Instructions should
then be given by you to your bank to transfer funds by wire to State Street
Bank and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Active Balanced Fund,
specifying on the wire the account number assigned by PMFS and your name and
identifying the class in which you are eligible to invest (Class A, Class B,
Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Active Balanced
Fund, Class A, Class B, Class C or Class Z shares and your name and individual
account
29
<PAGE>
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing federal funds. The minimum amount which may be invested by wire is
$1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE
STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE,
THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge waived
of 5% of the public offering (currently being or reduced for certain
price charged at a rate purchases
of .25 of 1%)
CLASS B Maximum CDSC of 5% of the 1% Shares convert to Class A
lesser of the amount shares approximately seven
invested or the redemption years after purchase
proceeds; declines to zero
after six years
CLASS C Maximum initial sales charge 1% Shares do not convert to
of 1% of the public offering another class
price and maximum CDSC of 1%
of the lesser of the amount
invested or the redemption
proceeds on redemptions made
within 18 months of purchase
CLASS Z None Sold to a limited group of
None investors
</TABLE>
The four classes of shares of the Fund represent an interest in the same
portfolio of investments of the Fund and have the same rights, except that (i)
each class is subject to different sales charges and distribution and/or
service fees (except for Class Z shares, which are not subject to any sales
charge or distribution and/or service fee), 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 "How to Exchange Your Shares" below. The income attributable to
each class and the dividends payable on the shares of each class will be
reduced by the amount of the distribution fee (if any) of each class. Class B
and Class C shares bear the expenses of a higher distribution fee which will
generally cause them to have higher expense ratios and to pay lower dividends
than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
30
<PAGE>
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the sales charge plus the cumulative annual distribution-related
fee on Class A shares would exceed those of the Class B and Class C shares if
you redeem your investment during this time period. In addition, more of your
money would be invested initially in the case of Class C shares, because of
the relatively low initial sales charge, and all of your money would be
invested initially in the case of Class B shares, which are sold at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related fee on Class A shares would be less than those of the Class B and
Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in
the case of Class C shares for the higher cumulative annual distribution-
related fee on those shares plus, in the case of Class C shares, the 1%
initial sales charge to exceed the initial sales charge plus the cumulative
annual distribution-related fees on Class A shares. This does not take into
account the time value of money, which further reduces the impact of the
higher Class B or Class C distribution-related fee on the investment,
fluctuations in NAV, the effect of the return on the investment over this
period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES, UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
--------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire sales charge to Dealers. Dealers may
be deemed to be underwriters, as that term is defined under the federal
securities laws. The Distributor reserves the right, without prior notice to
any Dealer, to suspend or eliminate Dealer concessions or commissions.
31
<PAGE>
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
may pay Dealers, financial advisers and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the NAV of
shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code, "rabbi" trusts and non-qualified deferred compensation
plans that are sponsored by any employer that has a tax qualified benefit plan
with Prudential (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 the Transfer Agent
or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities 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 provides
administrative or recordkeeping services, 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 PruArray Program (benefit plan recordkeeping service) (hereafter referred
to as a PruArray Plan). All Benefit Plans of a company (or affiliated
companies under common control) for which Prudential serves as plan
administrator or recordkeeper are aggregated in meeting the $1 million
threshold, provided that Prudential has been notified in advance of the
entitlement to the waiver of the sales charge based on the aggregated assets.
The term "existing assets" as used herein includes stock issued by a plan
sponsor, shares of Prudential Mutual Funds and shares of certain unaffiliated
mutual funds that participate in the PruArray Plan (Participating Funds).
"Existing assets" also include monies invested in The Guaranteed Investment
Account (GIA), a group annuity insurance product issued by Prudential, the
Guaranteed Insulated Separate Account, a separate account offered 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 Plan provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at NAV 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
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
32
<PAGE>
Accumulation Plan account with the Transfer Agent and (ii) spouses of
employees who open an IRA account with the Transfer Agent. The Program is
offered to companies that have at least 250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray 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
the Distributor or the Transfer Agent, by the following persons: (a) officers
of the Prudential Mutual Funds (including the Fund), (b) employees of the
Distributor, Prudential Securities, 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 the Distributor, 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
purchases, (g) investors in Individual Retirement Accounts, provided the
purchase is made in a directed rollover to such Individual Retirement Account
or with the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services, and
further provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution, (h) orders placed by broker-dealers, investment
advisers or financial planners who have entered into an agreement with the
Distributor, who place trades for their own accounts or the accounts of their
clients and who charge a management, consulting or other fee for their
services (e.g., mutual fund "wrap" or asset allocation programs), and (i)
orders placed by clients of broker-dealers, investment advisers or financial
planners who place trades for customer accounts if the accounts are linked to
the master account of such broker-dealer, investment adviser or financial
planner and the broker-dealer, investment adviser or financial planner charges
its clients a separate fee for its services (e.g., mutual fund "supermarket
programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
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 in proper form by the Transfer Agent, your Dealer or the
Distributor, plus, in the case of Class C shares, an initial sales charge of
1%. Redemptions of Class B and Class C shares may be subject to a CDSC. See
"How to Sell Your Shares--Contingent Deferred Sales Charges."
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to Dealers, financial advisers and
other persons which sell Class B shares at the time of sale. This facilitates
the ability of the Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates
that it will recoup its advancement of sales commissions from the combination
of the CDSC and the distribution fee. See "How the Fund is Managed--
Distributor." In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, Dealers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 2% of the
purchase price at the time of the sale.
33
<PAGE>
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
Benefit Plans. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class C shares may be purchased at NAV by participants who are repaying the
loans made from such plans to the participant.
Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in the PruArray Plan
and other plans for which Prudential provides administrative or recordkeeping
services.
Investments of Redemption Proceeds from Other Investment
Companies. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (i)
investors purchasing shares through an account at Prudential Securities; (ii)
investors purchasing shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation (Prusec); and (iii) investors
purchasing shares through other Dealers. This waiver is not available to
investors who purchase shares directly from the Transfer Agent. You must
notify the Transfer Agent directly or through your Dealer if you are entitled
to this waiver and provide the Transfer Agent with such supporting documents
as it may deem appropriate.
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 plans and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code and non-qualified
plans for which the Fund is an available option (collectively, Benefit Plans),
provided such Benefit Plans (in combination with other plans sponsored by the
same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants in any fee-based program or
trust program sponsored by an affiliate of the Distributor which includes
mutual funds as investment options and for which the Fund is an available
option; (iii) certain participants in the Medley Program (group variable
annuity contracts) sponsored by an affiliate of the Distributor for whom Class
Z shares of the Prudential Mutual Funds are an available option; (iv) Benefit
Plans for which an affiliate of the Distributor provides administrative or
recordkeeping services and as of September 20, 1996, (a) were Class Z
shareholders of the Prudential Mutual Funds or (b) executed a letter of intent
to purchase Class Z shares of the Prudential Mutual Funds; (v) current and
former Directors/Trustees of the Prudential Mutual Funds (including the Fund);
(vi) employees of Prudential or Prudential Securities who participate in an
employer-sponsored employee savings plan; and (vii) Prudential with an
investment of $10 million or more. After a Benefit Plan qualifies to purchase
Class Z shares, all subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay Dealers, financial advisers and other
persons which distribute shares a finders' fee, from its own resources, based
on a percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM (IN
ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION
WITH INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER. See "How the Fund Values
34
<PAGE>
its Shares." In certain cases, however, redemption proceeds will be reduced by
the amount of any applicable CDSC, as described below. See "Contingent
Deferred Sales Charges" below. If you are redeeming your shares through a
Dealer, your Dealer must receive your sell order before the Fund computes its
NAV for that day (i.e., 4:15 P.M., New York time) in order to receive that
day's NAV. Your Dealer will be responsible for furnishing all necessary
documentation to the Distributor and may charge you for its services in
connection with redeeming shares of the Fund.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS
REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE
OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your
Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Prudential
Preferred Financial Services offices. In the case of redemptions from a
PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan, in the name of the record holder and at the
same address as reflected in the Transfer Agent's records, a signature
guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. IF YOU
HOLD SHARES THROUGH A DEALER, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL
BE CREDITED TO YOUR ACCOUNT AT YOUR DEALER, UNLESS YOU INDICATE OTHERWISE.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the Commission, by order, so permits;
provided that applicable rules and regulations of the Commission shall govern
as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT
OF THE PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY
PURCHASING SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the Commission. Securities will be readily marketable and
will be valued in the same manner as a regular redemption. See "How the Fund
Values its Shares." If your shares are redeemed in kind, you would incur
transaction costs in converting the assets into cash. The Company has,
however, elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period
for any one shareholder.
35
<PAGE>
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give any such shareholder 60 days' prior written notice in which to
purchase sufficient additional shares to avoid such redemption. No CDSC will
be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will be on a pro rata basis. You must notify the Transfer Agent,
either directly or through the Distributor or your Dealer, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal tax treatment of any gain realized upon redemption. However, if
the redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes. For
more information on the rule that disallows a loss on the sale or exchange of
shares of the Fund which are replaced, see "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (or one year in the case of
shares purchased prior to November 2, 1998) will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and 18 months, in the case of Class C
shares (or one year in the case of shares purchased prior to November 2,
1998). A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor," "Waiver of Contingent Deferred Sales Charges--Class B
Shares" and "Waiver of Contingent Deferred Sales Charges--Class C Shares"
below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh....................................... None
</TABLE>
36
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results generally in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of the Fund's shares made during the preceding six
years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), or a trust, at the time of death or
initial determination or disability, provided that the shares were purchased
prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are: (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 (including a Roth IRA), a lump-sum or other distribution
after attaining age 59 1/2 or a periodic distribution based on life
expectancy; (iii) in the case of a Section 403(b) custodial account, a lump-
sum or other distribution after attaining age 59 1/2; and (iv) 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. Finally, the CDSC will be waived to the extent that
the proceeds from shares redeemed are invested in Prudential Mutual Funds, The
Guaranteed Investment Account, the Guaranteed Insulated Separate Account, or
units of The Stable Value Fund. The waiver does not apply in the case of a
tax-free rollover or transfer of assets, other than one following a separation
from service, i.e., following voluntary or involuntary termination of
employment or following retirement. Under no circumstances will the CDSC be
waived on redemptions resulting from the termination of a tax-deferred
retirement plan unless such redemptions otherwise qualify as a waiver as
described above. In the case of Direct Account and Prudential Securities or
Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted
will thereafter be subject to a CDSC without regard to the time such amounts
were previously invested. In the case of a 401(k) plan, the CDSC will also be
waived upon the redemption of shares purchased with amounts used to repay
loans made from the account to the participant and from which a CDSC was
previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
37
<PAGE>
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Company.
You must notify the Transfer Agent either directly or through your Dealer,
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of
Additional Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account and units of The
Stable Value Fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a Dealer not affiliated with Prudential and for
whom the Dealer provides administrative or recordkeeping services.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was
38
<PAGE>
made. For Class B shares previously exchanged for shares of a money market
fund, the time period during which such shares were held in the money market
fund will be excluded. For example, Class B shares held in a money market fund
for one year will not convert to Class A shares until approximately eight
years from purchase. For purposes of measuring the time period during which
shares are held in a money market fund, exchanges will be deemed to have been
made on the last day of the month. Class B shares acquired through exchange
will convert to Class A shares after expiration of the conversion period
applicable to the original purchase of such shares.
The conversion feature is subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (i) that the dividends
and other distributions paid on Class A, Class B, Class C and Class Z shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B,
CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER SERIES OF THE COMPANY OR
ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed
at the time of exchange. Any applicable CDSC payable upon the redemption of
shares exchanged will be that imposed by the fund in which shares are
initially purchased and will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. Class B and Class C shares may not be exchanged into money market
funds other than Prudential Special Money Market Fund, Inc. For purposes of
calculating the holding period applicable to the Class B conversion feature,
the time period during which Class B shares were held in a money market fund
will be excluded. See "Conversion Feature--Class B Shares" above. An exchange
will be treated as a redemption and purchase for tax purposes. See
"Shareholder Investment Account--Exchange Privilege" in the Statement of
Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call either Fund at (800) 225-1852 to execute a telephone exchange of shares,
on weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M.,
New York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
39
<PAGE>
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares, will have
their Class B and Class C shares which are not subject to a CDSC and their
Class A shares exchanged for Class Z shares on a quarterly basis. Eligibility
for this exchange privilege will be calculated on the business day prior to
the date of the exchange. Amounts representing Class B or Class C shares which
are not subject to a CDSC include the following: (1) amounts representing
Class B or Class C shares acquired pursuant to the automatic reinvestment of
dividends and distributions, (2) amounts representing the increase in the net
asset value above the total 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,
Prusec or another Dealer that they are eligible for this special exchange
privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they join the program. Upon leaving the program (whether voluntarily or
not), such Class Z shares (and, to the extent provided for in the program,
Class Z shares acquired through participation in the program) will be
exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and
exchanges by any person, group or commonly controlled accounts, if, in the
Manager's sole judgment, such person, group or accounts were following a
market timing strategy or were otherwise engaging in excessive trading (Market
Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions of the Fund are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through your Dealer, you should contact your Dealer.
. AUTOMATIC INVESTMENT PLAN (AIP). Under AIP you may make regular purchases
of the Fund's shares in amounts as little as $50 via an automatic debit to a
bank account or brokerage account (including a Command Account). For
additional information about this service, you may contact the Distributor,
your Dealer or the Transfer Agent directly.
40
<PAGE>
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from your Dealer or the Transfer
Agent. If you are considering adopting such a plan, you should consult with
your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional
Information.
. THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential makes
available optional group term life insurance coverage to purchasers of shares
of certain Prudential Mutual Funds which are held in an eligible brokerage
account. This insurance protects the value of your mutual fund investment for
your beneficiaries against market downturns. The insurance benefit is based on
the difference at the time of the insured's death between the "protected
value" and the then current market value of the shares. This coverage is not
available in all states and is subject to various restrictions and
limitations. For more complete information about this program, including
charges and expenses, please contact your Prudential representative.
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey
07102-4077. In addition, monthly unaudited financial data are available upon
request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Company at
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey
07102-4077, or by telephone, at (800) 225-1852 (toll-free) or, from outside
the U.S.A. at (732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
41
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone either Fund at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
TAX-EXEMPT BOND
FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Funds
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
. Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special Characteristics?............. 2
FUND EXPENSES.............................................................. 5
FINANCIAL HIGHLIGHTS....................................................... 6
HOW THE FUND INVESTS....................................................... 10
Investment Objective and Policies......................................... 10
Other Investments and Policies............................................ 16
Risk Factors and Special Considerations of
Investing in Foreign Securities.......................................... 17
Risk Factors Relating to Investing in Debt
Securities Rated Below Investment Grade (Junk Bonds)..................... 18
Hedging and Return Enhancement Strategies................................. 19
Investment Restrictions................................................... 21
HOW THE FUND IS MANAGED.................................................... 22
Manager................................................................... 22
Distributor............................................................... 23
Fee Waivers and Subsidy................................................... 24
Portfolio Transactions.................................................... 24
Custodian and Transfer and Dividend Disbursing Agent...................... 24
Year 2000 Readiness Disclosure............................................ 24
HOW THE FUND VALUES ITS SHARES............................................. 25
HOW THE FUND CALCULATES PERFORMANCE........................................ 25
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 26
GENERAL INFORMATION........................................................ 28
Description of Common Stock............................................... 28
Additional Information.................................................... 28
SHAREHOLDER GUIDE.......................................................... 29
How to Buy Shares of the Fund............................................. 29
Alternative Purchase Plan................................................. 30
How to Sell Your Shares................................................... 34
Conversion Feature--Class B Shares........................................ 38
How to Exchange Your Shares............................................... 39
Shareholder Services...................................................... 40
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF185A
<TABLE>
<S> <C>
CUSIP Nos.:
Class A: 74437E 883
Class B: 74437E 875
Class C: 74437E 867
Class Z: 74437E 859
</TABLE>
Prudential Active Balanced Fund
PROSPECTUS
November 30, 1998
www.prudential.com
[LOGO] Prudential Investments
<PAGE>
PRUDENTIAL JENNISON GROWTH FUND
- -------------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 30, 1998
- -------------------------------------------------------------------------------
Prudential Jennison Growth Fund (the Fund) is a series of The Prudential
Investment Portfolios, Inc., formerly Prudential Jennison Series Fund, Inc.
(the Company), a diversified, open-end, management investment company.
THE FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL. The Fund seeks
to achieve its objective by investing primarily in equity securities (common
stock, preferred stock and securities convertible into common stock) of
established companies with above-average growth prospects. Current income, if
any, is incidental. Under normal market conditions, the Fund intends to invest
at least 65% of its total assets in equity securities of companies that exceed
$1 billion in market capitalization.
The Fund may 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 foreign currencies and options thereon to hedge its
portfolio and to attempt to enhance return. There can be no assurance that the
Fund's investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies." The Company's address is Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its telephone
number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission (the
Commission) in a Statement of Additional Information, dated November 30, 1998,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Fund at the address or telephone number noted above. The Commission maintains
a Web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Fund.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL JENNISON GROWTH FUND?
The Fund is a mutual fund. A mutual fund pools the resources of investors by
selling its shares to the public and investing the proceeds of such sale in a
portfolio of securities designed to achieve its investment objectives.
Technically, the Fund is a series of The Prudential Investment Portfolios,
Inc., an open-end, diversified, management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term growth of capital. It seeks to
achieve this objective by investing primarily in equity securities (common
stock, securities convertible into common stock and preferred stock) of
established companies with above-average growth prospects. Current income, if
any, is incidental. There can be no assurance that the Fund's investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies" at page 10.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
Securities of the kinds of companies in which the Fund invests may be subject
to significant price fluctuation and above-average risk. Thus, the Fund may be
considered subject to greater investment risks than are assumed by certain
other investment companies. In addition, companies achieving an earnings growth
rate higher than that of S&P 500 companies tend to reinvest their earnings
rather than distribute them. As a result, the Fund is not likely to receive
significant dividend income on its portfolio securities. Accordingly, an
investment in the Fund should not be considered as a complete investment
program and may not be appropriate for all investors.
Under normal market conditions, the Fund intends to invest at least 65% of
its total assets in equity securities of companies that exceed $1 billion in
market capitalization. See "How the Fund Invests--Investment Objective and
Policies" at page 10. The Fund may also invest in (i) other equity securities
including up to 20% of its total assets in securities of foreign issuers, (ii)
investment grade fixed-income securities and (iii) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities,
including mortgage-backed securities. Investing in securities of foreign
companies and countries involves certain risks and considerations not typically
associated with investments in domestic companies. See "How the Fund Invests--
Risk Factors and Special Considerations of Investing in Foreign Securities" at
page 15. The Fund may also engage in various hedging and return enhancement
strategies including using derivatives. See "How the Fund Invests--Hedging and
Return Enhancement Strategies--Risks of Hedging and Return Enhancement
Strategies" at page 18. As with an investment in any mutual fund, an investment
in the Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
manager of the Fund and is compensated for its services at an annual rate of
.60 of 1% of the Fund's average daily net assets. As of October 31, 1998, PIFM
served as manager or administrator to 67 investment companies, including 45
mutual funds, with aggregate assets of approximately $68.2 billion. Jennison
Associates LLC (Jennison, the Subadviser or the investment adviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PIFM. See "How the Fund is Managed--Manager"
at page 19 and "How the Fund is Managed--Subadviser" at page 19.
2
<PAGE>
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares and is
paid a distribution and service fee with respect to Class A shares which is
currently being charged at the annual rate of .25 of 1% of the average daily
net assets of the Class A shares and is paid a distribution and service fee
with respect to Class B and Class C shares at an annual rate of 1% of the
average daily net assets of each of the Class B and Class C shares. The
Distributor incurs the expense of distributing the Fund's Class Z shares under
a Distribution Agreement with the Company, none of which is reimbursed or paid
for by the Fund. See "How the Fund is Managed--Distributor" at page 19.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
$2,500 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirements. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Investment Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 26 and "Shareholder Guide--Shareholder Services" at
page 37.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent). In each case, sales are made at the net asset value per share
(NAV) next determined after receipt of your purchase order by the Transfer
Agent, a Dealer or the Distributor, plus a sales charge which may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at NAV without any sales charge. Dealers may charge their customers a
separate fee for handling purchase transactions. See "How the Fund Values its
Shares" at page 22 and "Shareholder Guide--How to Buy Shares of the Fund" at
page 26.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses)
approximately seven years after purchase.
. Class C Shares: Sold with an initial sales charge of 1% and, for 18 months
after purchase, are subject to a CDSC of 1% on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares but Class C shares do not convert to
another class.
. Class Z Shares: Sold without an initial sales charge or CDSC to a limited
group of investors. Class Z shares are not subject to any
ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 27.
3
<PAGE>
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after your
Dealer, the Distributor or the Transfer Agent receives your sell order. The
proceeds of redemptions of Class B and Class C shares may be subject to a CDSC.
Dealers may charge their customers a separate fee for handling sale
transactions. See "Shareholder Guide--How to Sell Your Shares" at page 31.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, semi-
annually and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that they
be paid to you in cash. See "Taxes, Dividends and Distributions" at page 23.
4
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None 1% None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions None
decreasing by 1% annually to 1% made within 18
in the fifth and the sixth years months of purchase
and 0% in the seventh year*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net assets)
Management Fees........ .60% .60% .60% .60%
12b-1 Fees (After Re-
duction)............. .25%++ 1.00% 1.00% None
Other Expenses......... .23% .23% .23% .23%
---- ---- ---- ---
Total Fund Operating
Expenses (After
Reduction)........... 1.08% 1.83% 1.83% .83%
==== ==== ==== ===
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual re-
turn and (2) redemption at the end of each time
period:
Class A....................................... $60 $83 $107 $175
Class B....................................... $69 $88 $109 $186
Class C....................................... $38 $67 $108 $223
Class Z....................................... $ 8 $26 $ 46 $103
You would pay the following expenses on the
same investment, assuming no redemption:
Class A....................................... $60 $83 $107 $175
Class B....................................... $19 $58 $ 99 $186
Class C....................................... $28 $67 $108 $223
Class Z....................................... $ 8 $26 $ 46 $103
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." The above example is based on expenses
incurred during the fiscal year ended September 30, 1998. "Other Expenses"
include Directors' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian (domestic and foreign) fees (but
excludes foreign withholding taxes).
- ------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges (12b-1 fees)
on shares of the Fund may not exceed 6.25% of total gross sales, subject to
certain exclusions. This 6.25% limitation is imposed on the Fund rather than
on a per shareholder basis. Therefore, long-term Class B and Class C
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay up to an annual rate of .30 of 1% of the average daily net assets of
the Class A shares, the Distributor has agreed to limit its distribution
fees with respect to Class A shares of the Fund to .25 of 1% of the average
daily net assets of the Class A shares. This voluntary waiver may be
terminated at any time without notice. See "How the Fund is Managed--
Distributor." Total Fund Operating Expenses for Class A shares without this
limitation would be 1.13%.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(CLASS A SHARES)
The following financial highlights for the two years ended September 30, 1998
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the period from November 2, 1995 through September 30, 1996 have been
audited by other independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of common stock
of the Fund outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-------------------------------
NOV. 2,
YEAR ENDED 1995(A)
SEPTEMBER 30, THROUGH
------------------- SEPT. 30,
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 15.39 $ 10.97 $ 10.00
-------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (d).......... (.04) (.03) (.03)
Net realized and unrealized gain on
investment transactions.................. .40 4.45 1.00
-------- -------- -------
Total from investment operations......... .36 4.42 .97
-------- -------- -------
LESS DISTRIBUTIONS:
Distributions from net realized gains..... (1.31) -- --
-------- -------- -------
Net asset value, end of period............ $ 14.44 $ 15.39 $ 10.97
======== ======== =======
TOTAL RETURN(C): ......................... 3.02 % 40.29 % 9.70 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $446,996 $145,022 $85,440
Average net assets (000).................. $251,118 $105,982 $70,667
Ratios to average net assets:
Expenses, including distribution fees.... 1.08 % 1.09 % 1.23 %(b)
Expenses, excluding distribution fees.... .83 % .84 % .98 %(b)
Net investment income (loss)............. (.26)% (.25)% (.37)%(b)
Portfolio turnover rate................... 58 % 63 % 42 %
</TABLE>
- ------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(CLASS B SHARES)
The following financial highlights for the two years ended September 30, 1998
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the period from November 2, 1995 through September 30, 1996 have been
audited by other independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of common stock
of the Fund outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-------------------------------
NOV. 2,
YEAR ENDED 1995(A)
SEPTEMBER 30, THROUGH
------------------- SEPT. 30,
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 15.18 $ 10.89 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(d)........... (.15) (.12) (.10)
Net realized and unrealized gain on
investment transactions.................. .39 4.41 .99
-------- -------- --------
Total from investment operations......... .24 4.29 .89
-------- -------- --------
LESS DISTRIBUTIONS:
Distributions from net realized gains..... (1.31) -- --
-------- -------- --------
Net asset value, end of period............ $ 14.11 $ 15.18 $ 10.89
======== ======== ========
TOTAL RETURN(C): ......................... 2.21 % 39.39 % 8.90 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $708,463 $419,405 $231,541
Average net assets (000).................. $557,823 $299,476 $162,412
Ratios to average net assets:
Expenses, including distribution fees.... 1.83 % 1.84 % 1.98 %(b)
Expenses, excluding distribution fees.... .83 % .84 % .98 %(b)
Net investment income (loss)............. (1.01)% (1.00)% (1.12)%(b)
Portfolio turnover rate................... 58 % 63 % 42 %
</TABLE>
- ------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(CLASS C SHARES)
The following financial highlights for the two years ended September 30, 1998
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the period from November 2, 1995 through September 30, 1996 have been
audited by other independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class C share of common stock
of the Fund outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-----------------------------
NOV. 2,
YEAR ENDED 1995(A)
SEPTEMBER 30, THROUGH
----------------- SEPT. 30,
1998 1997 1996
------- ------- ---------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 15.18 $ 10.89 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(d)............. (.15) (.12) (.10)
Net realized and unrealized gain on
investment transactions.................... .39 4.41 .99
------- ------- -------
Total from investment operations........... .24 4.29 .89
------- ------- -------
LESS DISTRIBUTIONS:
Distributions from net realized gains....... (1.31) -- --
------- ------- -------
Net asset value, end of period.............. $ 14.11 $ 15.18 $ 10.89
======= ======= =======
TOTAL RETURN(C): ........................... 2.21 % 39.39 % 8.90 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............. $45,126 $25,134 $15,281
Average net assets (000).................... $35,337 $18,248 $12,550
Ratios to average net assets:
Expenses, including distribution fees...... 1.83 % 1.84 % 1.98 %(b)
Expenses, excluding distribution fees...... .83 % .84 % .98 %(b)
Net investment income (loss)............... (1.01)% (1.00)% (1.12)%(b)
Portfolio turnover rate..................... 58 % 63 % 42 %
</TABLE>
- ------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
8
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(CLASS Z SHARES)
The following financial highlights for the two years ended September 30, 1998
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the period from April 15, 1996 through September 30, 1996 have been audited
by other independent auditors, whose reports thereon were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
of the Fund outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
--------------------------------
APRIL 15,
YEAR ENDED 1996(A)
SEPTEMBER 30, THROUGH
--------------------- SEPT. 30,
1998 1997 1996
---------- -------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period..... $ 15.45 $ 10.98 $ 10.32
---------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(d).......... -- -- (.02)
Net realized and unrealized gain on
investment transactions................. .39 4.47 .68
---------- -------- --------
Total from investment operations........ .39 4.47 .66
---------- -------- --------
LESS DISTRIBUTIONS:
Distributions from net realized gains.... (1.31) -- --
---------- -------- --------
Net asset value, end of period........... $ 14.53 $ 15.45 $ 10.98
========== ======== ========
TOTAL RETURN(C): ........................ 3.22 % 40.71% 6.40 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......... $1,021,903 $609,869 $362,416
Average net assets (000)................. $ 810,296 $455,684 $ 26,829
Ratios to average net assets:
Expenses, including distribution fees... .83 % .84% .98 %(b)
Expenses, excluding distribution fees... .83 % .84% .98 %(b)
Net investment income (loss)............ (.01)% -- (.12)%(b)
Portfolio turnover rate.................. 58 % 63% 42 %
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
9
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL. THE FUND
SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING PRIMARILY IN EQUITY SECURITIES
(COMMON STOCK, PREFERRED STOCK AND SECURITIES CONVERTIBLE INTO COMMON STOCK)
OF ESTABLISHED COMPANIES WITH ABOVE-AVERAGE GROWTH PROSPECTS. CURRENT INCOME,
IF ANY, IS INCIDENTAL. THERE CAN BE NO ASSURANCE THAT THE FUND'S OBJECTIVE
WILL BE ACHIEVED. See "Investment Objectives and Policies" in the Statement of
Additional Information.
UNDER NORMAL MARKET CONDITIONS, THE FUND INTENDS TO INVEST AT LEAST 65% OF
ITS TOTAL ASSETS IN EQUITY SECURITIES OF COMPANIES THAT EXCEED $1 BILLION IN
MARKET CAPITALIZATION. COMPANIES WITH MARKET CAPITALIZATIONS IN EXCESS OF
$1 BILLION ARE GENERALLY CONSIDERED MEDIUM TO LARGE CAPITALIZATION COMPANIES.
Stocks will be selected on a company-by-company basis primarily through the
use of fundamental analysis. The Fund's investment adviser looks for companies
that have demonstrated growth in earnings and sales, high returns on equity
and assets, or other strong financial characteristics and, in the judgment of
the investment adviser, are attractively valued. These companies tend to have
a unique market niche, a strong new product profile or superior management.
The Fund may also invest up to 35% of its total assets in (i) equity
securities of other companies that are undergoing changes in management or
product and marketing dynamics that have not yet been reflected in reported
earnings but that are expected to impact earnings in the intermediate-term--
these securities often lack investor recognition and are often favorably
valued, (ii) other equity-related securities, (iii) 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.
The effort to achieve superior investment return necessarily involves a risk
of exposure to declining values. Securities in which the Fund may primarily
invest have historically been more volatile than the S&P 500 Index.
Accordingly, during periods when stock prices decline generally, it can be
expected that the value of the Fund will decline more than market indices.
Securities of the kinds of companies in which the Fund invests may be
subject to significant price fluctuation and above-average risk. In addition,
companies achieving an earnings growth rate higher than that of S&P 500
companies tend to reinvest their earnings rather than distribute them. As a
result, the Fund is not likely to receive significant dividend income on its
portfolio securities. Accordingly, an investment in the Fund should not be
considered as a complete investment program and may not be appropriate for all
investors.
The Fund may purchase and sell put and call options on equity securities,
stock indices and foreign currencies, purchase and sell futures contracts on
stock indices and foreign currencies and options thereon and enter into
foreign currency forward contracts to hedge its portfolio and to attempt to
enhance return. The Fund may also lend its portfolio securities, enter into
repurchase agreements and purchase securities on a when-issued and delayed
delivery basis.
The Fund reserves the right as a defensive measure to hold temporarily other
types of securities without limit, including high quality commercial paper,
bankers' acceptances, non-convertible debt securities (corporate and
government) or government and high quality money market securities of U.S. and
non-U.S. issuers, or cash (foreign currencies or U.S. dollars), in such
proportions as, in the opinion of its investment adviser, prevailing market,
economic or political conditions warrant. The Fund also may temporarily hold
cash and invest in high quality foreign or domestic money market instruments
pending investment of proceeds from new sales of Fund shares or to meet
ordinary daily cash needs. See "Other Investments and Policies" below.
10
<PAGE>
As with an investment in any mutual fund, an investment in the Fund can
decrease in value and you can lose money.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (INVESTMENT COMPANY ACT). INVESTMENT POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S. Treasury
or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the issuing agency. See
"Investment Objectives and Policies--U.S. Government Securities" in the
Statement of Additional Information.
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities and other derivative mortgage products, including those
representing an undivided ownership interest in a pool of mortgages, e.g.,
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
certificates where the U.S. Government or its agencies or instrumentalities
guarantees the payment of interest and principal of these securities. These
guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do these guarantees
extend to the yield or value of the Fund's shares. See "Investment Objectives
and Policies--U.S. Government Securities" in the Statement of Additional
Information. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal
payments from the mortgages underlying the certificate, net of certain fees.
Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a
period of rising interest rates. Accordingly, amounts available for
reinvestment by the Fund are likely to be greater during a period of declining
interest rates and, as a result, likely to be reinvested at lower interest
rates than during a period of rising interest rates. Mortgage-backed
securities may decrease in value as a result of increases in interest rates
and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may purchase collateralized
mortgage obligations (CMOs) issued by agencies or instrumentalities of the
U.S. Government. A CMO is backed by a portfolio of mortgages or mortgage-
backed securities. The issuer's obligation to make interest and principal
payments is secured by the underlying portfolio of mortgages or mortgage-
backed securities. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit (REMIC). All future references to CMOs
include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the underlying mortgage assets may be allocated among the several classes of a
CMO series in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a
more predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities.
The Fund also may invest in mortgage-backed security strips (MBS strips)
issued by the U.S. Government or its agencies or instrumentalities. MBS strips
are usually structured with two classes that receive different proportions of
the interest and
11
<PAGE>
principal distributions on a pool of mortgage assets. A common type of
stripped mortgage security will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yields to maturity on IOs and POs are
sensitive to the expected or anticipated rate of principal payments (including
prepayments) on the related underlying mortgage assets, and principal payments
may have a material effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
In reliance on rules and interpretations of the Securities and Exchange
Commission (Commission), the Fund's investments in certain qualifying CMOs and
REMICs are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objectives and
Policies--Mortgage-Related Securities" in the Statement of Additional
Information.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Fund may invest in investment grade corporate and other debt obligations
of domestic and foreign issuers, including convertible securities and money
market instruments. Bonds and other debt securities are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and must repay the amount borrowed at maturity. Investment
grade debt securities are rated within the four highest quality grades as
determined by Moody's Investors Service, Inc. (Moody's) (currently Aaa, Aa, A
and Baa for bonds), or Standard & Poor's Ratings Group (S&P) (currently AAA,
AA, A and BBB for bonds), or comparably rated by another nationally recognized
statistical rating organization (NRSRO) or in unrated securities which are of
equivalent quality in the opinion of Jennison. If a security (or issuer) held
by the Fund is assigned a rating below investment grade (or, in the view of
Jennison, if a security has declined in credit quality so that it is
comparable to a security rated below investment grade), Jennison will seek to
dispose of the security as soon as reasonably practicable. Securities rated
Baa by Moody's, although considered to be investment grade, lack outstanding
investment characteristics and, in fact, have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make interest and principal payments than is the
case with higher grade bonds. Such lower rated securities are subject to a
greater risk of loss of principal and interest.
EQUITY-RELATED SECURITIES. The Fund may invest in equity-related securities.
Equity-related securities include common stocks, preferred stocks, securities
convertible or exchangeable for common stocks or preferred stocks, equity
investments in partnerships, joint ventures and other forms of non-corporate
investments, American Depositary Receipts (ADRs) and American Depositary
Shares (ADSs), and warrants and rights exercisable for equity securities. See
"Convertible Securities, Warrants and Rights" below.
ADRs and ADSs are U.S. dollar-denominated certificates or shares issued by a
U.S. bank or trust company and represent the right to receive securities of a
foreign issuer deposited in a domestic bank or foreign branch of a U.S. bank
and traded on a U.S. exchange or in an over-the-counter market. Generally,
ADRs and ADSs are in registered form. There are no fees imposed on the
purchase or sale of ADRs when purchased from the issuing bank or trust company
in the initial underwriting, although the issuing bank or trust company may
impose charges for the collection of dividends and the conversion of ADRs or
ADSs into the underlying securities. Investment in ADRs and ADSs has certain
advantages over direct investment in the underlying foreign securities since:
(i) ADRs and ADSs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (ii) issuers whose securities are represented by ADRs or ADSs
are usually subject to comparable auditing, accounting and financial reporting
standards as domestic issuers.
CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS
A CONVERTIBLE SECURITY IS A BOND, DEBENTURE, CORPORATE NOTE, PREFERRED STOCK
OR OTHER SIMILAR SECURITY WHICH MAY BE CONVERTED AT A STATED PRICE WITHIN A
SPECIFIED PERIOD OF TIME INTO A CERTAIN QUANTITY OF THE COMMON STOCK OR OTHER
12
<PAGE>
EQUITY SECURITIES OF THE SAME OR A DIFFERENT ISSUER. A warrant or right
entitles the holder to purchase equity securities at a specific price for a
specific period of time. Convertible securities are senior to common stocks in
a corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation dependent upon a market price advance
in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
In recent years, convertible securities have been developed which combine
higher or lower current income with options and other features. The Fund may
invest in these types of convertible securities.
The Fund may invest in convertible securities which are rated investment
grade or in unrated securities of comparable quality.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest a portion of its assets in equity securities and fixed-
income securities of foreign issuers (denominated in either U.S. or foreign
currency). ADRs and ADSs (both of which are U.S. dollar-denominated
certificates issued by a U.S. bank or trust company that represent the right
to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. bank) are not included in any limitation on
investment in foreign securities.
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic
and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar denominated or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase. The Fund may invest in money market instruments without
limit for temporary defensive and cash management purposes. To the extent the
Fund otherwise invests in money market instruments, it is subject to the
limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 20%
of its total assets to secure these borrowings. If the Fund's asset coverage
for borrowings falls below 300%, the Fund will take prompt action to reduce
its borrowings. The Fund will not purchase portfolio securities when
borrowings exceed 5% of the value of its total assets. See "Investment
Objectives and Policies--Borrowing" in the Statement of Additional
Information.
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REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss. See "Investment Objectives and Policies--
Repurchase Agreements" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and privately placed commercial paper that have a
readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors. The
Fund's investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is not expected to exceed 100%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information. In addition, high portfolio turnover may result in
increased short-term capital gains which, when distributed to shareholders,
are treated as ordinary income. See "Taxes, Dividends and Distributions."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and/or yield to the Fund at the time of
entering into the transaction. While the Fund will only purchase securities on
a when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record
the transaction and thereafter reflect the value, each day, of such security
in determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Fund's
Custodian will segregate cash or other liquid assets having a value equal to
or greater than the Fund's purchase commitments. Subject to this requirement,
the Fund may purchase securities on such basis without limit. See "Investment
Objectives and Policies--When-Issued and Delayed Delivery Securities" in the
Statement of Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral (which may
include a secured letter
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of credit) in an amount equal to at least 100%, determined daily, of the
market value of the securities loaned which is segregated pursuant to
applicable regulations. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividend or interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. As with any extensions of credit, there are risks of delay
in recovery and in some cases loss of rights in the collateral should the
borrower of the securities fail financially. As a matter of fundamental
policy, the Fund may not lend more than 30% of the value of its total assets.
See "Investment Objectives and Policies--Lending of Securities" in the
Statement of Additional Information. The Fund may pay reasonable
administration and custodial fees in connection with a loan.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales "against-the-box." A short sale is against-
the-box when the Fund enters into a short sale of a security which the Fund
owns or has the right to obtain at no added cost. No more than 25% of the
Fund's net assets (determined at the time of the short sale against-the-box)
may be subject to such sales.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBLE IMPOSITION OF EXCHANGE
CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may be subject
to greater fluctuations in price than securities issued by U.S. corporations
or issued or guaranteed by the U.S. Government, its instrumentalities or
agencies. In addition, there may be less publicly available information about
a foreign company than about a domestic company. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic companies. There is
generally less government regulation of securities exchanges, brokers and
listed companies abroad than in the United States and there is a possibility
of expropriation, confiscatory taxation or diplomatic developments which could
affect investment.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are
generally higher than U.S. brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred. The Fund may, but need not, enter into forward foreign currency
exchange contracts, options on foreign currencies and futures contracts on
foreign currencies and related options, for hedging purposes, including:
locking-in the U.S. dollar price of the purchase or sale of securities
denominated in a foreign currency; locking-in the U.S. dollar equivalent of
dividends to be paid on such securities which are held by the Fund; and
protecting the U.S. dollar value of such securities which are held by the
Fund.
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<PAGE>
SHAREHOLDERS SHOULD BE AWARE THAT INVESTING IN THE EQUITY MARKETS OF
DEVELOPING COUNTRIES INVOLVES EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS
DIVERSE AND MATURE, AND TO POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE
LESS STABILITY, THAN THOSE OF DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE
INDICATES THAT THE MARKETS OF DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE
THAN THE MARKETS OF DEVELOPED COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS
IN FOREIGN SECURITIES, DESCRIBED ABOVE, MAY BE GREATER WITH RESPECT TO
INVESTMENTS IN DEVELOPING COUNTRIES.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY IF THE FUND
IS UNSUCCESSFUL IN ITS USE OF THESE STRATEGIES. These strategies currently
include the use of options, forward currency exchange contracts and futures
contracts and options thereon. The Fund's ability to use these strategies may
be limited by market conditions, regulatory limits and tax considerations and
there can be no assurance that any of these strategies will succeed. See
"Investment Objectives and Policies" and "Taxes, Dividends and Distributions"
in the Statement of Additional Information. Jennison does not intend to buy
all of these instruments or use all of these strategies to the full extent
permitted unless it believes that doing so will help the Fund achieve its
objectives. New financial products and risk management techniques continue to
be developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON EQUITY
SECURITIES, STOCK INDICES (E.G., S&P 500) AND FOREIGN CURRENCIES THAT ARE
TRADED ON U.S. OR FOREIGN SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER
(OTC) MARKET TO ENHANCE RETURN OR TO HEDGE ITS PORTFOLIO. The Fund may write
put and call options to generate additional income through the receipt of
premiums, purchase put options in an effort to protect the value of securities
(or currencies) that it owns against a decline in market value and purchase
call options in an effort to protect against an increase in the price of
securities (or currencies) it intends to purchase. The Fund may also purchase
put and call options to offset previously written put and call options of the
same series. See "Investment Objectives and Policies--Options on Securities"
in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY SUBJECT
TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The
writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities
or currency in excess of the exercise price of the option during the period
that the option is open. The Fund will write only "covered" call options for
which it (i) owns an offsetting position in the underlying security or
currency or (ii) segregates cash or other liquid assets with a value
sufficient at all times to cover its obligations.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
The Fund will write only put options for which it (i) owns an offsetting
position in the underlying security or currency or (ii) segregates cash or
other liquid assets with a value sufficient at all times to cover its
obligations.
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FOREIGN CURRENCY FORWARD CONTRACTS
THE FUND MAY ENTER INTO FOREIGN CURRENCY FORWARD CONTRACTS TO PROTECT THE
VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY EXCHANGE
RATES. The Fund may enter into such contracts on a spot, i.e., cash, basis at
the rate then prevailing in the currency exchange market or on a forward
basis, by entering into a forward contract to purchase or sell currency. A
forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract at a price set on the
date of the contract.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although
there are no limits on the number of forward contracts which the Fund may
enter into, the Fund may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of foreign currency)
of the securities being hedged. See "Investment Objectives and Policies--Risks
Related to Foreign Currency Forward Contracts" in the Statement of Additional
Information.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(CFTC). THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. These futures contracts and related
options will be on stock indices and foreign currencies. A futures contract is
an agreement to purchase or sell an agreed amount of securities or currencies
at a set price for delivery in the future. A stock index futures contract is
an agreement to purchase or sell cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. The Fund
may purchase and sell stock index futures contracts or related options as a
hedge against changes in market conditions.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the market value
of the Fund's total assets. The Fund may purchase and sell futures contracts
and related options, without limitation, for bona fide hedging purposes in
accordance with regulations of the CFTC (i.e., to reduce certain risks of its
investments). The total contract value of all futures contracts sold will not
exceed the total market value of the Fund's investments.
Futures contracts and related options are generally subject to segregation
requirements of the Commission and coverage requirements of the CFTC. If the
Fund does not hold the security or currency underlying the futures contract,
it will be required to segregate on an ongoing basis with its Custodian cash
or other liquid assets having an amount at least equal to its obligations with
respect to such futures contracts. The Fund may place and maintain cash,
securities and similar investments with a futures commission merchant in
amounts necessary to effect the Fund's transactions in exchange-traded futures
contracts and options thereon, provided certain conditions are satisfied.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies underlying the futures contract is
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<PAGE>
imperfect and there is a risk that the value of the securities or currencies
underlying the futures contract may increase or decrease at a greater rate
than the related futures contracts resulting in losses to the Fund. Certain
futures exchanges or boards of trade have established daily limits on the
amount that the price of futures contracts or related options may vary, either
up or down, from the previous day's settlement price. These daily limits may
restrict the Fund's ability to purchase or sell certain futures contracts or
related options on any particular day.
The Fund's ability to enter into or close out futures contracts and options
thereon is limited by the requirements of the Internal Revenue Code of 1986,
as amended (Internal Revenue Code) for qualification as a regulated investment
company. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS
ITS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency or interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, foreign currency and futures contracts and options on futures
contracts include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices
of the securities or currencies being hedged; (3) the fact that skills needed
to use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the risk that the counterparty may be
unable to complete the transaction; and (6) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate liquid assets in connection with hedging
transactions. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if management believes that the
other party to the options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will
continue to exist or that the other party will continue to make a market.
Thus, it may not be possible to close out an option or futures transaction.
The inability to close out options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with whom the Fund has an open position in an
option, a futures contract or related option.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE COMPANY HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
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For the fiscal year ended September 30, 1998, the Fund's total expenses as a
percentage of average net assets for Class A, Class B, Class C and Class Z
shares were 1.08%, 1.83%, 1.83% and .83%, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE
MANAGER OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF
.60 OF 1% OF THE FUND'S AVERAGE DAILY NET ASSETS. PIFM is organized in New
York as a limited liability company. For the fiscal year ended September 30,
1998, the Fund paid management fees to PIFM of .60 of 1% of the Fund's average
net assets. See "Manager and Subadvisers" in the Statement of Additional
Information.
As of October 31, 1998, PIFM served as the manager to 67 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $68.2 billion.
Under a Management Agreement with the Company, PIFM manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager and Subadvisers" in the Statement of Additional Information.
SUBADVISER
JENNISON ASSOCIATES LLC (JENNISON, THE SUBADVISER OR THE INVESTMENT
ADVISER), 466 LEXINGTON AVENUE, NEW YORK, NEW YORK 10017, IS THE SUBADVISER TO
THE FUND. As of September 30, 1998, Jennison had approximately $39.3 billion
in assets under management for institutional and mutual fund clients,
including over $22.5 billion in "growth stock" assets.
PURSUANT TO A SUBADVISORY AGREEMENT WITH PIFM, JENNISON FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS
COMPENSATED BY PIFM FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1% OF THE
FUND'S AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $300 MILLION AND .25 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF $300 MILLION.
Under the Subadvisory Agreement, Jennison, subject to the supervision of
PIFM, is responsible for managing the assets of the Fund in accordance with
the Fund's investment objective, investment program and policies. Jennison
determines what securities and other instruments are purchased and sold for
the Fund and is responsible for obtaining and evaluating financial data
relevant to the Fund.
DAVID POIESZ IS THE PORTFOLIO MANAGER OF THE FUND AND PETER REINEMANN IS THE
ASSOCIATE PORTFOLIO MANAGER OF THE FUND. Mr. Poiesz is responsible for the
day-to-day management of the Fund. They are both Directors of Jennison and
have been involved with the Fund since its inception in 1995. Mr. Poiesz, an
Executive Vice President of Jennison, joined Jennison in 1983 as an equity
research analyst and has been an equity portfolio manager since 1991. Mr.
Poiesz also serves as the Portfolio Manager of the Prudential Jennison
Portfolio of The Prudential Series Fund, Inc., a registered investment
company. Mr. Reinemann, a Senior Vice President of Jennison, has been with
Jennison since 1992 as an associate portfolio manager. Prior to that time, he
served as a Vice President at Paribas Asset Management, Inc.
PIFM and Jennison are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE
FUND. IT IS A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities
Incorporated (Prudential Securities), One Seaport Plaza, New York, New York
10292, previously served as the distributor of the Fund's shares. It is an
indirect, wholly-owned subsidiary of Prudential.
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UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING
THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs
the expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Fund. These
expenses include commissions and account servicing fees paid to, or on account
of, Dealers or financial institutions which have entered into agreements with
the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of the
Distributor associated with the sale of the Fund's shares, including lease,
utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the
distribution, marketing, administrative and other services and activities
provided by Dealers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has
voluntarily limited 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. This
voluntary waiver may be terminated at any time without notice.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES AT AN
ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B AND
CLASS C SHARES. The Class B and Class C Plans provide for the payment to the
Distributor of (i) an asset-based sales charge of .75 of 1% of the average
daily net assets of the Class B and Class C shares, respectively, and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class
B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges."
For the fiscal year ended September 30, 1998, the Fund paid distribution
expenses of .25%, 1.00% and 1.00% of the average daily net assets of the Class
A, Class B and Class C shares, respectively. The Fund records all payments
made under the Plans as expenses in the calculation of net investment income.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund will be allocated to each such class of the Fund based
upon the ratio of sales of each such class to the sales of Class A, Class B or
Class C shares of the Fund other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Company, including a
majority of the Directors who are not "interested persons" of the Company (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement
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related to the Plan (the Rule 12b-1 Directors), vote annually to continue the
Plan. Each Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors or of a majority of the outstanding shares of the
applicable class of the Fund. The Fund will not be obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to Dealers and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons
or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has waived a portion of its distribution fee for the Class A
shares as described above under "Distributor." Fee waivers will increase the
Fund's total return. These voluntary waivers may be terminated at any time
without notice. See "Performance Information" in the Statement of Additional
Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Company. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent for the
Fund and in those capacities maintains certain books and records for the
Company. PMFS is a wholly-owned subsidiary of PIFM. Its mailing address is
P.O. Box 15035, New Brunswick, New Jersey 08906-5035.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund,
the Manager, the Distributor, the Transfer Agent and the Custodian have
advised the Fund that they have been actively working on necessary changes to
their computer systems to prepare for the year 2000 and expect that their
systems, and those of outside service providers, will be adapted in time for
that event.
Additionally, issuers of securities generally as well as those purchased by
the Fund may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of securities held
by the Fund.
21
<PAGE>
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Company's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect its
NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distribution and/or service
fees. It is expected, however, that the NAV of the four classes will tend to
converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of distribution and/or service fee expense
accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL
RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The total return shows how much an
investment in the Fund would have increased (decreased) over a specified
period of time (i.e., one, five, or ten years or since inception of the Fund)
assuming that all distributions and dividends by the Fund were reinvested on
the reinvestment dates during the period and less all recurring fees. The
aggregate total return reflects actual performance over a stated period of
time. Average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. Average annual total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average
annual total return nor aggregate total return takes into account any federal
or state income taxes which may be payable upon redemption. The yield refers
to the income generated by an investment in the Fund over a one-month or 30-
day period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage
of the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period. The Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., and other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information will be contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
22
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON NET INVESTMENT INCOME AND
NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked-
to-market" for federal income tax purposes; that is, treated as having been
sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency fluctuation
losses exceed other investment company taxable income during a taxable year,
distributions made by the Fund during the year would be characterized as a
return of capital to shareholders, reducing the shareholder's basis in his or
her Fund shares.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term capital gains (i.e., the excess of net short-term capital gains
over net long-term capital losses) distributed to shareholders will be taxable
as ordinary income to the shareholder whether or not reinvested. Any net
capital gains (i.e., the excess of net long-term capital gains over net short-
term capital losses) distributed to shareholders will be taxable as long-term
capital gains to the shareholder, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
federal long-term capital gains rate for individual shareholders is 20% and
the maximum statutory federal tax rate for ordinary income is 39.6%. The
maximum statutory federal long-term capital gains rate and the maximum
statutory federal tax rate for ordinary income for corporate shareholders
currently is 35%.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are
declared. This rule applies to dividends declared by the Fund in October,
November or December of a calendar year, payable to shareholders of record on
a date in any such month, if such dividends are paid during January of the
following calendar year.
Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign corporations, interest income, capital and currency
gain, gain or loss from Section 1256 contracts and income from certain other
sources will not be eligible for the corporate dividends-received deduction.
See "Taxes, Dividends and Distributions" in the Statement of Additional
Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends-received deduction.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital
23
<PAGE>
gain or loss. Any such loss with respect to shares that are held for six
months or less, however, will be treated as a long-term capital loss to the
extent of any capital gain distributions received by the shareholder. With
respect to non-corporate shareholders, gain or loss on shares held more than
one year will be considered in determining a holder's adjusted net capital
gain subject to a maximum statutory tax rate of 20%.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds payable on the accounts of certain shareholders who fail to furnish
their correct tax identification numbers to the IRS on Form W-9 (or IRS Form
W-8 in the case of certain foreign shareholders) with the required
certifications regarding the shareholder's status under the federal income tax
law. Withholding at this rate is also required from dividends and capital
gains distributions (but not redemption proceeds) payable to shareholders who
are otherwise subject to backup withholding. Dividends of net investment
income and short-term gains paid to a foreign shareholder will generally be
subject to U.S. withholding tax at the rate of 30% (or lower treaty rate).
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, SEMI-
ANNUALLY AND TO MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-
TERM CAPITAL LOSSES AT LEAST ANNUALLY. Dividends paid by the Fund with respect
to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class other than Class Z will bear its own
distribution and/or service fee charges, generally resulting in lower
dividends for Class B and Class C shares in relation to Class A and Class Z
shares and lower dividends for Class A shares in relation to Class Z shares.
Distribution of net capital gains, if any, will be paid in the same amount per
share for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE FUND,
BASED ON THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE
BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT
LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH
DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services LLC, Attn: Account Maintenance, P.O. Box
15035, New Brunswick, New Jersey 08906-5035. The Fund will notify its
shareholders after the close of the Fund's taxable year both of the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE TO THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF THE FUND.
24
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE COMPANY WAS INCORPORATED IN MARYLAND ON AUGUST 10, 1995. THE COMPANY IS
AUTHORIZED TO ISSUE 3 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, DIVIDED INTO THREE SERIES OR PORTFOLIOS, PRUDENTIAL ACTIVE BALANCED
FUND, PRUDENTIAL JENNISON GROWTH FUND AND PRUDENTIAL JENNISON GROWTH & INCOME
FUND. EACH SERIES IS FURTHER DIVIDED INTO FOUR CLASSES OF SHARES, 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 THE COMPANY.
Each class of common stock of each Fund represents an interest in the same
assets of such Fund and is identical in all respects except that (i) each
class is subject to different sales charges and distribution and/or service
fees (except for Class Z shares, which are not subject to any sales charges
and distribution and/or service fees), which may affect performance, (ii) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (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 Company's Articles of Incorporation, the Board of
Directors may authorize the creation of additional series of common stock and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Board may determine.
The Company's expenses generally are allocated among the series on the basis
of relative net assets at the time of allocation, except that expenses
directly attributable to a series are charged to such series.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares (with the exception of
Class Z shares, which are not subject to any distribution or service fees).
Except for the conversion feature applicable to the Class B shares, there are
no conversion, preemptive or other subscription rights. In the event of
liquidation, each share of common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debts and expenses of the Fund have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of
those classes are likely to be lower than to Class A shareholders and to Class
Z shareholders, whose shares are not subject to any distribution and/or
service fees. The Company's shares do not have cumulative voting rights for
the election of Directors.
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE COMPANY WILL NOT BE REQUIRED TO HOLD MEETINGS
OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO
BE ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS
HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10%
OR MORE OF THE COMPANY'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE
REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Company with the
Commission under the Securities Act of 1933, as amended. Copies of the
Registration Statement may be obtained at a reasonable charge from the
Commission or may be examined, without charge, at the office of the Commission
in Washington, D.C.
25
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH DEALERS
OR DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15035, NEW BRUNSWICK, NEW JERSEY 08906-5035. The purchase price is
the NAV next determined following receipt of an order in proper form (in
accordance with procedures established by the Transfer Agent in connection
with investors' accounts) by the Distributor, your Dealer or the Transfer
Agent, plus a sales charge which, at your option, may be imposed either (i) at
the time of purchase (Class A or Class C shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at NAV without any sales charge. Payment may be made by wire, check
or through your brokerage account. See "Alternative Purchase Plan" below. See
also "How the Fund Values its Shares."
In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P.M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the
Fund's NAV is computed that day and must transmit the order to the Distributor
that same day for you to receive that day's NAV.
The minimum initial investment for the Fund is $1,000 for Class A and Class
B shares and $2,500 for Class C shares, except that the minimum initial
investment for Class C shares may be waived from time to time. There is no
minimum initial investment requirement for Class Z shares. The minimum
subsequent investment is $100 for all classes, except for Class Z shares, for
which there is no such minimum. All minimum investment requirements are waived
for certain retirement and employee savings plans or custodial accounts for
the benefit of minors. For purchases through the Automatic Investment Plan,
the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Application forms can be obtained from the Transfer Agent, the Distributor
or a Dealer. If a stock certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares.
Shareholders who hold their shares in street name with their Dealer will not
receive stock certificates.
Your Dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Dealers may charge their customers a separate fee for processing purchases
and redemptions. In addition, transactions in shares of the Fund may be
subject to postage and handling charges imposed by your Dealer. Any such
charges are retained by the Dealer and are not remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone the Transfer Agent to receive an
account number at (800) 225-1852 (toll-free). The following information will
be requested: your name, address, tax identification number, class election,
dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by
wire to State Street Bank and Trust Company (State Street), Boston,
Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Jennison Growth Fund, specifying on the wire the account number
assigned by the Transfer Agent and your name and identifying the class in
which you are eligible to invest (Class A, Class B, Class C or Class Z
shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
26
<PAGE>
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Jennison Growth
Fund, Class A, Class B, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing federal funds. The minimum amount which may be invested by
wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE
STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE,
THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge waived
of 5% of the public offering (currently being or reduced for certain
price charged at a rate purchases
of .25 of 1%)
CLASS B Maximum CDSC of 5% of the 1% Shares convert to Class A
lesser of the amount shares approximately seven
invested or the redemption years after purchase
proceeds; declines to zero
after six years
CLASS C Maximum initial sales charge 1% Shares do not convert to
of 1% of the public offering another class
price and maximum CDSC of 1%
of the lesser of the amount
invested or the redemption
proceeds on redemptions made
within 18 months of purchase
CLASS Z None Sold to a limited group of
None investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charge or
distribution and/or service fee), 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
"How to Exchange Your Shares" below. The income attributable to each class and
the dividends payable on the shares of each class will be reduced by the
amount of the distribution fee (if any) of each class. Class B and Class C
shares bear the expenses of a higher distribution fee which will generally
cause them to have higher expense ratios and to pay lower dividends than the
Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
27
<PAGE>
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the sales charge plus the cumulative annual distribution-related
fee on Class A shares would exceed those of the Class B and Class C shares if
you redeem your investment during this time period. In addition, more of your
money would be invested initially in the case of Class C shares, because of
the relatively low initial sales charge, and all of your money would be
invested initially in the case of Class B shares, which are sold at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related fee on Class A shares would be less than those of the Class B and
Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in
the case of Class C shares for the higher cumulative annual distribution-
related fee on those shares plus, in the case of Class C shares, the 1%
initial sales charge to exceed the initial sales charge plus the cumulative
annual distribution-related fees on Class A shares. This does not take into
account the time value of money, which further reduces the impact of the
higher Class B or Class C distribution-related fee on the investment,
fluctuations in NAV, the effect of the return on the investment over this
period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES, UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
--------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
28
<PAGE>
The Distributor may reallow the entire sales charge to Dealers. Dealers may
be deemed to be underwriters, as that term is defined under the federal
securities laws. The Distributor reserves the right, without prior notice to
any Dealer, to suspend or eliminate Dealer concessions or commissions.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
may pay Dealers, financial advisers and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the NAV of
shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code and "rabbi" trusts (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 the Transfer Agent or Prudential Securities and for which
the Transfer Agent or Prudential Securities does individual account
recordkeeping (Direct Account Benefit Plans), Class A shares may be purchased
at NAV by participants who are repaying loans made from such plans to the
participant.
Special Rules Applicable to Retirement Plans. After a Benefit 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
the Distributor or the Transfer Agent, by the following persons: (a) officers
of the Prudential Mutual Funds (including the Fund), (b) employees of the
Distributor and PIFM and their subsidiaries and members of the families of
such persons who maintain an "employee related" account at 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 the Distributor,
provided that purchases at NAV are permitted by such person's employer, (f)
investors in Individual Retirement Accounts, provided the purchase is made in
a directed rollover to such Individual Retirement Account or with proceeds of
a tax-free rollover of assets from a Benefit Plan for which Prudential
provides administrative or recordkeeping services, and further provided that
such purchase is made within 60 days of receipt of the Benefit Plan
distribution, (g) investors previously eligible to purchase Class A shares at
NAV because of their participation in programs sponsored by an affiliate of
the Distributor for certain retirement plan or deferred compensation plan
participants, (h) orders placed by broker-dealers, investment advisers or
financial planners who have entered into an agreement with the Distributor,
who place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services (e.g.,
mutual fund "wrap" or asset allocation programs), and (i) orders placed by
clients of broker-dealers, investment advisers or financial planners who place
trades for customer accounts if the accounts are linked to the master account
of such broker-dealer, investment adviser or financial planner and the broker-
dealer, investment adviser or financial planner charges its clients a separate
fee for its services (e.g., mutual fund "supermarket" programs).
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<PAGE>
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale, either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
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 in proper form by the Transfer Agent, your Dealer or the
Distributor plus, in the case of Class C shares, an initial sales charge of
1%. Redemptions of Class B and Class C shares may be subject to a CDSC. See
"How to Sell Your Shares--Contingent Deferred Sales Charges."
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to Dealers, financial advisers and
other persons which sell Class B shares at the time of sale. This facilitates
the ability of the Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates
that it will recoup its advancement of sales commissions from the combination
of the CDSC and the distribution fee. See "How the Fund is Managed--
Distributor." In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, Dealers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 2% of the
purchase price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
Benefit Plans. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class C shares may be purchased at NAV by participants who are repaying the
loans made from such plans to the participant.
Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in the PruArray Plan
and other plans for which Prudential provides administrative or recordkeeping
services.
Investments of Redemption Proceeds from Other Investment
Companies. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (i)
investors purchasing shares through an account at Prudential Securities; (ii)
investors purchasing shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation; and (iii) investors purchasing
shares through other Dealers. This waiver is not available to investors who
purchase shares directly from the Transfer Agent. You must notify the Transfer
Agent directly or through your Dealer if you are entitled to this waiver and
provide the Transfer Agent with such supporting documents as it may deem
appropriate.
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<PAGE>
CLASS Z SHARES
Class Z shares currently are available for purchase by: (i) pension, profit-
sharing or other employee benefit plans qualified under Section 401 of the
Internal Revenue Code, deferred compensation and annuity plans under Sections
457 and 403(b)(7) of the Internal Revenue Code and non-qualified plans for
which the Fund is an available option (collectively, Benefit Plans), provided
such Benefit Plans (in combination with other plans sponsored by the same
employer or group of related employers) have at least $50 million in defined
contribution assets; (ii) participants in any fee-based program or trust
program sponsored by an affiliate of the Distributor which includes mutual
funds as investment options and for which the Fund is an available option;
(iii) certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by an affiliate of the Distributor for whom Class Z
shares of the Prudential Mutual Funds are an available option; (iv) Benefit
Plans for which an affiliate of the Distributor provides administrative or
recordkeeping services and as of September 20, 1996, (a) were Class Z
shareholders of the Prudential Mutual Funds or (b) executed a letter of intent
to purchase Class Z shares of the Prudential Mutual Funds; (v) current and
former Directors/Trustees of the Prudential Mutual Funds (including the Fund);
(vi) employees of certain affiliates of the Distributor who participate in a
Prudential-sponsored employee savings plan and (vii) Prudential with an
investment of $10 million or more. After a Benefit Plan qualifies to purchase
Class Z shares, all subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay Dealers, financial advisers and other
persons which distribute shares a finders' fee from its own resources based on
a percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM (IN
ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION
WITH INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER. See "How the Fund Values its Shares." In certain cases, however,
redemption proceeds will be reduced by the amount of any applicable CDSC, as
described below. See "Contingent Deferred Sales Charges" below. If you are
redeeming your shares through a Dealer, your Dealer must receive your sell
order before the Fund computes its NAV for that day (i.e., 4:15 P.M., New York
time) in order to receive that day's NAV. Your Dealer will be responsible for
furnishing all necessary documentation to the Distributor and may charge you
for its services in connection with redeeming shares of the Fund.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS
REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE
OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15035, New Brunswick, New Jersey 08906-5035, the Distributor or to your
Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution.
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<PAGE>
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. If you
hold shares through a Dealer, payment for shares presented for redemption will
be credited to your account at your Dealer unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (a)
when the New York Stock Exchange is closed for other than customary weekends
and holidays, (b) when trading on such Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or (d) during any
other period when the Commission, by order, so permits; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR THE TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT
OF THE PURCHASE CHECK BY THE FUND OR THE TRANSFER AGENT. SUCH DELAY MAY BE
AVOIDED BY PURCHASING SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the Commission. Securities will be readily marketable and
will be valued in the same manner as a regular redemption. See "How the Fund
Values its Shares." If your shares are redeemed in kind, you would incur
transaction costs in converting the assets into cash. The Company has,
however, elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period
for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a NAV of less than $500 due to a redemption. The Fund will give
any such shareholder 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will be on a pro rata basis. You must notify the Transfer Agent,
either directly or through your Dealer or the Distributor, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal tax treatment of any gain realized upon redemption. However, if
the redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes. For
more information on the rule which disallows a loss on the sale or exchange of
shares of the Fund which are replaced, see "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (or one year in the case of
shares purchased prior to November 2, 1998) will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and
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<PAGE>
reduce the amount paid to you. The CDSC will be imposed on any redemption by
you which reduces the current value of your Class B or Class C shares to an
amount which is lower than the amount of all payments by you for shares during
the preceding six years, in the case of Class B shares, and 18 months, in the
case of Class C shares (or one year in the case of shares purchased prior to
November 2, 1998). A CDSC will be applied on the lesser of the original
purchase price or the current value of the shares being redeemed. Increases in
the value of your shares or shares purchased through reinvestment of dividends
or distributions are not subject to a CDSC. The amount of any contingent
deferred sales charge will be paid to and retained by the Distributor. See
"How the Fund is Managed--Distributor," "Waiver of Contingent Deferred Sales
Charges--Class B Shares" and "Waiver of Contingent Deferred Sales Charges--
Class C Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh....................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results generally in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of the Fund's shares made during the preceding six
years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in
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<PAGE>
joint tenancy (with rights of survivorship), or a trust, at the time of death
or initial determination or disability, provided that the shares were
purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are: (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 (including a Roth IRA), a lump-sum or other distribution
after attaining age 59 1/2 or a periodic distribution based on life
expectancy; (iii) in the case of a Section 403(b) custodial account, a lump-
sum or other distribution after attaining age 59 1/2; and (iv) 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. Finally, the CDSC will be waived to the extent that
the proceeds from shares redeemed are invested in Prudential Mutual Funds, The
Guaranteed Investment Account, a group annuity insurance product issued by
Prudential, The Guaranteed Insulated Separate Account, a separate account
offered by Prudential, or units of The Stable Value Fund, an unaffiliated bank
collective fund. The waiver does not apply in the case of a tax-free rollover
or transfer of assets, other than one following a separation from service,
i.e., following voluntary or involuntary termination of employment or
following retirement. Under no circumstances will the CDSC be waived on
redemptions resulting from the termination of a tax-deferred retirement plan
unless such redemptions otherwise qualify as a waiver as described above.
Shares purchased with amounts used to repay a loan from such plans on which a
CDSC was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Company.
You must notify the Transfer Agent either directly or through your Dealer,
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of
Additional Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account and units of The
Stable Value Fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a Dealer not affiliated with Prudential and for
whom the Dealer provides administrative or recordkeeping services.
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.
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<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature is subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (i) that the dividends
and other distributions paid on Class A, Class B, Class C and Class Z shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B,
CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER SERIES OF THE COMPANY OR
ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed
at the time of exchange. Any applicable CDSC payable upon the redemption of
shares exchanged will be that imposed by the fund in which shares are
initially purchased and will be calculated from the first day of the month
after the initial purchase,
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<PAGE>
excluding the time shares were held in a money market fund. Class B and Class
C shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which
Class B shares were held in a money market fund will be excluded. See
"Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15035, New Brunswick,
New Jersey 08906-5035.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares, will have
their Class B and Class C shares which are not subject to a CDSC and their
Class A shares exchanged for Class Z shares on a quarterly basis. Eligibility
for this exchange privilege will be calculated on the business day prior to
the date of the exchange. Amounts representing Class B or Class C shares which
are not subject to a CDSC include the following: (1) amounts representing
Class B or Class C shares acquired pursuant to the automatic reinvestment of
dividends and distributions, (2) amounts representing the increase in the net
asset value above the total 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 their Dealer that they
are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they join the program. Upon leaving the program (whether voluntarily or
not), such Class Z shares (and, to the extent provided for in the program,
Class Z shares acquired through participation in the program) will be
exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, terminated or
modified upon 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase
36
<PAGE>
orders and exchanges by any person, group or commonly controlled accounts, if,
in the Manager's sole judgment, such person, group or accounts were following
a market timing strategy or were otherwise engaging in excessive trading
(Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions of the Fund are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested.
. AUTOMATIC INVESTMENT PLAN (AIP). Under AIP you may make regular purchases
of the Fund's shares in amounts as little as $50 via an automatic debit to a
bank account or brokerage account. For additional information about this
service, you may contact the Transfer Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal
or tax adviser with respect to the establishment and maintenance of such a
plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional
Information.
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey
07102-4077. In addition, monthly unaudited financial data are available upon
request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Company at
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey
07102-4077, or by telephone, at (800) 225-1852 (toll-free) or, from outside
the U.S.A. at (732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
37
<PAGE>
APPENDIX A--INFORMATION ABOUT JENNISON ASSOCIATES LLC
Jennison has been engaged in the equity investment management business since
1969. As of September 30, 1998, Jennison managed $39.3 billion in assets for
180 clients, including approximately $8.7 billion (22%) in mutual funds. Of
the $39.3 billion in assets, $22.5 billion in assets were in growth equity
portfolios for 100 clients, with an average account size of $167.8 million. As
of September 30, 1998, Jennison also managed $359 million in growth and income
portfolios, $1.5 billion in balanced portfolios, $4.2 billion in international
equity portfolios, and $10.8 billion in fixed-income portfolios.
Jennison has an experienced team of investment professionals. The following
chart shows the total number of equity professionals employed by Jennison, as
of September 30, 1998, including the total number of portfolio managers and
the total number of equity research analysts.
<TABLE>
<CAPTION>
AVERAGE YEARS
AVERAGE YEARS OF EXPERIENCE
NUMBER OF EXPERIENCE WITH JENNISON
------ ------------- -------------
<C> <S> <C> <C>
16 Total Equity Professionals 18 11
5 Equity Portfolio Managers 25 17
8 Equity Research Analysts 13 5
</TABLE>
JENNISON'S GROWTH STRATEGY:
Growth stocks are stocks of companies that have long-term growth rates in
sales and earnings that are higher than those of the overall economy. Growth
stocks are generally more expensive than the average stock (sell at a higher
price/earnings ratio) because investors are often willing to pay a premium in
order to participate in the superior growth they expect from these companies.
Consequently, these stocks also entail somewhat higher risk if expectations
are not met.
Growth stock investing is subject to market risk. The returns from the S&P
500 Index for the past fifteen years have been particularly favorable from a
historical standpoint and there can be no assurance that this growth in the
overall stock market will continue. Securities in which the Fund may primarily
invest have historically been more volatile than the S&P 500 Index.
Accordingly, during periods when stock prices are declining generally, it can
be expected that the value of the Fund will decline more than market indices.
Jennison seeks to select attractive growth companies. The Jennison portfolio
managers' challenge is to select about 60 stocks that are believed to have the
potential to be the best performers among the larger universe of growth
stocks. Consequently, a growth stock portfolio managed by Jennison normally
consists of companies that the firm believes will experience superior earnings
growth over the next 12 to 18 months, on both an absolute and relative basis,
and which appear reasonably valued relative to growth expectations. Of course,
there can be no assurance that these stocks will achieve their growth
potential.
FUND PERFORMANCE:
Class A, B and C shares of the Fund commenced investment operations on
November 2, 1995; Class Z shares of the Fund commenced investment operations
on April 15, 1996. Aggregate total returns for the one year and from inception
periods ended September 30, 1998 were 3.02% and 58.55%, 2.21% and 55.16%,
2.21% and 55.16% and 3.22% and 54.53% for Class A, B, C and Z shares,
respectively, and average annual total returns for the one year and since
inception periods ended September 30, 1998 were (2.13)% and 15.11%, (2.79)%
and 15.51%, 1.21% and 16.29% and 3.22% and 19.36% for Class A, B, C and Z
shares, respectively.
A-1
<PAGE>
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 Fund in
exchange solely for Class Z shares of the Fund (the Reorganization). The
investment objectives and policies of the Growth Stock Fund were substantially
similar to those of the 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, 1998, your average annual
total returns for the one, five and since inception (November 5, 1992) periods
ended September 30, 1998 would have been 3.22%, 17.08% and 18.09%,
respectively. In addition, the aggregate total returns for such periods would
have been 3.22%, 120.01% and 166.70%, respectively.
A-2
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special Characteristics?............. 2
FUND EXPENSES.............................................................. 5
FINANCIAL HIGHLIGHTS....................................................... 6
HOW THE FUND INVESTS....................................................... 10
Investment Objective and Policies......................................... 10
Other Investments and Policies............................................ 13
Risk Factors and Special Considerations of
Investing in Foreign Securities.......................................... 15
Hedging and Return Enhancement Strategies................................. 16
Investment Restrictions................................................... 18
HOW THE FUND IS MANAGED.................................................... 18
Manager................................................................... 19
Subadviser................................................................ 19
Distributor............................................................... 19
Fee Waivers and Subsidy................................................... 21
Portfolio Transactions.................................................... 21
Custodian and Transfer and Dividend Disbursing Agent...................... 21
Year 2000 Readiness Disclosure............................................ 21
HOW THE FUND VALUES ITS SHARES............................................. 22
HOW THE FUND CALCULATES PERFORMANCE........................................ 22
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 23
GENERAL INFORMATION........................................................ 25
Description of Common Stock............................................... 25
Additional Information.................................................... 25
SHAREHOLDER GUIDE.......................................................... 26
How to Buy Shares of the Fund............................................. 26
Alternative Purchase Plan................................................. 27
How to Sell Your Shares................................................... 31
Conversion Feature--Class B Shares........................................ 34
How to Exchange Your Shares............................................... 35
Shareholder Services...................................................... 37
APPENDIX A--INFORMATION ABOUT JENNISON ASSOCIATES LLC...................... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF172P
<TABLE>
<S> <C>
CUSIP Nos.:
Class A: 74437E 10 7
Class B: 74437E 20 6
Class C: 74437E 30 5
Class Z: 74437E 40 4
</TABLE>
Prudential Jennison Growth Fund
PROSPECTUS
November 30, 1998
[LOGO] Prudential Investments
<PAGE>
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 30, 1998
- -------------------------------------------------------------------------------
Prudential Jennison Growth Fund (Growth Fund) and Prudential Jennison Growth &
Income Fund (Growth & Income Fund) (each a Fund and collectively, the Funds)
are each a series of The Prudential Investment Portfolios, Inc., formerly
Prudential Jennison Series Fund, Inc. (the Company), a diversified, open-end,
management investment company.
GROWTH FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL. The Growth
Fund seeks to achieve its objective by investing primarily in equity
securities (common stock, preferred stock and securities convertible into
common stock) of established companies with above-average growth prospects.
Current income, if any, is incidental. Under normal market conditions, 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.
GROWTH & INCOME FUND'S INVESTMENT OBJECTIVE 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.
Each Fund may engage in various derivative transactions such as using options
on stocks, stock indices and foreign currencies, entering into foreign
currency exchange contracts and the purchase and sale of futures contracts on
stock indices and foreign currencies and options thereon to hedge its
portfolio and to attempt to enhance return. The Growth & Income Fund may
engage in short sales. There can be no assurance that any Fund's investment
objective will be achieved. See "How the Funds Invest--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 Prospectus sets forth concisely the information about each Fund that a
prospective investor should know before investing and is available at the Web
site of The Prudential Insurance Company of America
(http://www.prudential.com). Additional information about the Funds has been
filed with the Securities and Exchange Commission (the Commission) in a
Statement of Additional Information, dated November 30, 1998, which
information is incorporated herein by reference (is legally considered a part
of this Prospectus) and is available without charge upon request to the
Company at the address or telephone number noted above. The Commission
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other
information regarding the Funds.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT ARE THE FUNDS?
Each Fund is a mutual fund. A mutual fund pools the resources of investors by
selling its shares to the public and investing the proceeds of such sale in a
portfolio of securities designed to achieve its investment objectives.
Technically, each Fund is a series of The Prudential Investment Portfolios,
Inc., an open-end, diversified, management investment company.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
GROWTH FUND: Growth Fund's investment objective is long-term growth of
capital. It seeks to achieve this objective by investing primarily in equity
securities (common stock, securities convertible into common stock and
preferred stock) of established companies with above-average growth prospects.
Current income, if any, is incidental. See "How the Funds Invest--Investment
Objectives and Policies" at page 12.
GROWTH & INCOME FUND: Growth & Income Fund's primary investment objective is
long-term growth of capital and income, with current income as a secondary
objective. It 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" at page 12.
There can be no assurance that any Fund's investment objective will be
achieved.
WHAT ARE EACH FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
GROWTH FUND: Securities of the kinds of companies in which the Growth Fund
invests may be subject to significant price fluctuation and above-average risk.
Thus, the Growth Fund may be considered subject to greater investment risks
than are assumed by certain other investment companies. In addition, companies
achieving an earnings growth rate higher than that of S&P 500 companies tend to
reinvest their earnings rather than distribute them. As a result, the Growth
Fund is not likely to receive significant dividend income on its portfolio
securities. Accordingly, an investment in the Growth Fund should not be
considered as a complete investment program and may not be appropriate for all
investors.
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. See "How the Funds Invest--Investment
Objectives and Policies" at page 12. The Growth Fund may also invest in (i)
other equity securities including up to 20% of its total assets in securities
of foreign issuers, (ii) investment grade fixed-income securities and (iii)
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, including mortgage-backed securities. Investing in
securities of foreign companies and countries involves certain risks and
considerations not typically associated with investments in domestic companies.
See "How the Funds Invest--Risk Factors and Special Considerations of Investing
in Foreign Securities" at page 19. The Growth Fund may also engage in various
hedging and return enhancement strategies including using derivatives. See "How
the Funds Invest--Hedging and Return Enhancement Strategies--Risks of Hedging
and Return Enhancement Strategies" at page 22. As with an investment in any
mutual fund, an investment in this Fund can decrease in value and you can lose
money.
2
<PAGE>
GROWTH & INCOME FUND: Growth & Income Fund invests primarily in common stocks
of established companies with growth prospects which are, in the opinion of the
investment adviser, underappreciated by the market. These may include companies
that are experiencing important changes in their business structure and
management philosophy. The ability of the investment adviser to successfully
identify these changes will be an important factor in the Growth & Income
Fund's performance record. Also, the Growth & Income Fund's portfolio holdings
may be characterized by volatility somewhat greater than the overall market.
Additionally, although current income is a secondary objective, some of the
Growth & Income Fund's holdings may pay little or no dividend income. See "How
the Funds Invest--Investment Objectives and Policies" at page 12.
The Growth & Income Fund may invest up to 20% of its total assets in equity
and debt securities of foreign issuers. Investing in securities of foreign
companies and countries involves certain risks and considerations not typically
associated with investments in domestic companies. See "How the Funds Invest--
Risk Factors and Special Considerations of Investing in Foreign Securities" at
page 19. The Growth & Income Fund may invest up to 10% of its total assets in
non-investment grade debt securities or in unrated securities of comparable
quality. Securities rated lower than Baa by Moody's Investors Service, Inc.
(Moody's) or BBB by Standard & Poor's Ratings Group, commonly known as "junk
bonds," are considered speculative and are subject to a greater risk of loss of
principal and interest than higher rated securities as well as greater price
volatility. See "How the Funds Invest--Risk Factors Relating to Investing in
Debt Securities Rated Below Investment Grade (Junk Bonds)--Growth & Income Fund
Only" at page 19. The Growth & Income Fund also may engage in short sales which
subject the Fund to additional risks. See "How the Funds Invest--Other
Investments and Policies--Short Sales" at page 18. The Growth & Income Fund
also may engage in various hedging and return enhancement strategies including
using derivatives. See "How the Funds Invest--Hedging and Return Enhancement
Strategies--Risks of Hedging and Return Enhancement Strategies" at page 22. As
with an investment in any mutual fund, an investment in this Fund can decrease
in value and you can lose money.
WHO MANAGES THE FUNDS?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
manager of each Fund and is compensated for its services at an annual rate of
.60 of 1% of the average daily net assets of each of Growth Fund and Growth &
Income Fund. As of October 31, 1998, PIFM served as manager or administrator to
67 investment companies, including 22 mutual funds, with aggregate assets of
approximately $68.2 billion. Jennison Associates LLC (Jennison, the Subadviser
or the investment adviser) furnishes investment advisory services in connection
with the management of each Fund under a Subadvisory Agreement with PIFM. See
"How the Funds are Managed--Manager" at page 23 and "How the Funds are
Managed--Subadviser" at page 23.
WHO DISTRIBUTES EACH FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as the
Distributor of the Company's Class A, Class B, Class C and Class Z shares and
is paid a distribution and service fee with respect to Class A shares which is
currently being charged at the annual rate of .25 of 1% of the average daily
net assets of the Class A shares and is paid a distribution and service fee
with respect to Class B and Class C shares at an annual rate of 1% of the
average daily net assets of each of the Class B and Class C shares. The
Distributor incurs the expense of distributing each Fund's Class Z shares under
a Distribution Agreement with the Company, none of which is reimbursed or paid
for by the Funds. See "How the Funds are Managed--Distributor" at page 24.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
$2,500 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
3
<PAGE>
investment requirements. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Investment Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Funds" at page 30 and "Shareholder Guide--Shareholder Services"
at page 42.
HOW DO I PURCHASE SHARES?
You may purchase shares of any Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent). In each case, sales are made at the net asset value per share
(NAV) next determined after receipt of your purchase order by the Transfer
Agent, a Dealer or the Distributor, plus a sales charge which may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at NAV without any sales charge. Dealers may charge their customers a
separate fee for handling purchase transactions. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. See "How Each Fund
Values its Shares" at page 26 and "Shareholder Guide--How to Buy Shares of the
Funds" at page 30.
WHAT ARE MY PURCHASE ALTERNATIVES?
Each Fund offers four classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses)
approximately seven years after purchase.
. Class C Shares: Sold with an initial sales charge of 1% and, for 18 months
after purchase, are subject to a CDSC of 1% on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but Class C shares do not convert to another class.
. Class Z Shares: Sold without an initial sales charge or CDSC to a limited
group of investors. Class Z shares are not subject to any
ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 31.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after your
Dealer, the Distributor or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. Dealers may charge their customers a separate fee for
handling sale transactions. Participants in programs sponsored by Prudential
Retirement Services should contact their client representative for more
information about selling their Class Z shares. See "Shareholder Guide--How to
Sell Your Shares" at page 36.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
Growth Fund and Growth & Income Fund expect to pay dividends of net
investment income, if any, semi-annually. Each Fund expects to make
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the
respective Fund at NAV without a sales charge unless you request that they be
paid to you in cash. See "Taxes, Dividends and Distributions" at page 27.
4
<PAGE>
FUND EXPENSES--GROWTH FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None 1% None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase None
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions None
decreasing by 1% annually to 1% made within
in the fifth and the sixth years 18 months of purchase
and 0% in the seventh year*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net assets)
Management Fees........ .60% .60% .60% .60%
12b-1 Fees (After Re-
duction)............. .25%++ 1.00% 1.00% None
Other Expenses......... .23% .23% .23% .23%
--- --- --- ---
Total Fund Operating
Expenses (After
Reduction)........... 1.08% 1.83% 1.83% .83%
==== ==== ==== ===
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual re-
turn and (2) redemption at the end of each time
period:
Class A....................................... $60 $83 $107 $175
Class B....................................... $69 $88 $109 $186
Class C....................................... $38 $67 $108 $223
Class Z....................................... $ 8 $26 $ 46 $103
You would pay the following expenses on the
same investment, assuming no redemption:
Class A....................................... $60 $83 $107 $175
Class B....................................... $19 $58 $ 99 $186
Class C....................................... $28 $67 $108 $223
Class Z....................................... $ 8 $26 $ 46 $103
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the various
types of costs and expenses that an investor in the Growth Fund will bear,
whether directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Funds are Managed." The above example is based
on expenses incurred during the fiscal year ended September 30, 1998. "Other
Expenses" includes Directors' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian (domestic and foreign) fees
(but excludes foreign withholding taxes).
- ------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges (12b-1 fees)
on shares of the Fund may not exceed 6.25% of total gross sales, subject to
certain exclusions. This 6.25% limitation is imposed on the Fund rather than
on a per shareholder basis. Therefore, long-term Class B and Class C
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Funds are Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Growth
Fund may pay up to an annual rate of .30 of 1% of the average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Growth Fund to .25
of 1% of the average daily net assets of the Class A shares. This voluntary
waiver may be terminated at any time without notice. See "How the Funds are
Managed--Distributor." Total Fund Operating Expenses for Class A shares
without this limitation would be 1.13%.
5
<PAGE>
FUND EXPENSES--GROWTH & INCOME FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None 1% None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions None
decreasing by 1% annually to made within 18
1% in the fifth and months of purchase
the sixth years and
0% in the seventh year*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net assets)
Management Fees........ .60% .60% .60% .60%
12b-1 Fees (After Re-
duction)............. .25%++ 1.00% 1.00% None
Other Expenses......... .46% .46% .46% .46%
---- ---- ---- ----
Total Fund Operating
Expenses
(After Reduction).... 1.31% 2.06% 2.06% 1.06%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual re-
turn and (2) redemption at the end of each time
period:
Class A....................................... $63 $89 $118 $200
Class B....................................... $71 $95 $121 $211
Class C....................................... $41 $74 $120 $247
Class Z....................................... $11 $34 $ 58 $129
You would pay the following expenses on the
same investment, assuming no redemption:
Class A....................................... $63 $89 $118 $200
Class B....................................... $21 $65 $111 $211
Class C....................................... $31 $74 $120 $247
Class Z....................................... $11 $34 $ 58 $129
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the various
types of costs and expenses that an investor in the Growth & Income Fund will
bear, whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Funds are Managed." The above example
is based on expenses incurred during the fiscal year ended September 30, 1998.
"Other Expenses" includes Directors' and professional fees, registration fees,
reports to shareholders and transfer agency and custodian (domestic and
foreign) fees (but excludes foreign withholding taxes).
- ------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges (12b-1 fees)
on shares of the Fund may not exceed 6.25% of total gross sales, subject to
certain exclusions. This 6.25% limitation is imposed on the Fund rather than
on a per shareholder basis. Therefore, long-term Class B and Class C
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Funds are Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Growth
& Income Fund may pay up to an annual rate of .30 of 1% of the average daily
net assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Growth & Income Fund
to .25 of 1% of the average daily net assets of the Class A shares. This
voluntary waiver may be terminated at any time without notice. See "How the
Funds are Managed--Distributor." Total Fund Operating Expenses for Class A
shares without this limitation would be 1.36%.
6
<PAGE>
FINANCIAL HIGHLIGHTS--GROWTH FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A SHARES)
The following financial highlights for the two years ended September 30, 1998
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the period from November 2, 1995 through September 30, 1996 have been
audited by other independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class A share of common
stock of the Growth Fund outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. Further
performance information is contained in the annual report, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------
YEAR ENDED NOVEMBER 2, 1995(A)
SEPTEMBER 30, THROUGH
------------------- SEPTEMBER 30,
1998 1997 1996
-------- -------- -------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 15.39 $ 10.97 $ 10.00
-------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(d)..... (.04) (.03) (.03)
Net realized and unrealized gain on
investment transactions............ .40 4.45 1.00
-------- -------- -------
Total from investment operations... .36 4.42 .97
-------- -------- -------
LESS DISTRIBUTIONS:
Distributions from net realized
gains.............................. (1.31) -- --
-------- -------- -------
Net asset value, end of period...... $ 14.44 $ 15.39 $ 10.97
======== ======== =======
TOTAL RETURN(C): ................... 3.02 % 40.29 % 9.70 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $446,996 $145,022 $85,440
Average net assets (000)............ $251,118 $105,982 $70,667
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.08 % 1.09 % 1.23 %(b)
Expenses, excluding distribution
fees.............................. .83 % .84 % .98 %(b)
Net investment income (loss)....... (.26)% (.25)% (.37)%(b)
Portfolio turnover rate............. 58 % 63 % 42 %
</TABLE>
- -----------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
7
<PAGE>
FINANCIAL HIGHLIGHTS--GROWTH FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS B SHARES)
The following financial highlights for the two years ended September 30, 1998
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the period from November 2, 1995 through September 30, 1996 have been
audited by other independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class B share of common
stock of the Growth Fund outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. Further
performance information is contained in the annual report, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------
YEAR ENDED NOVEMBER 2, 1995(A)
SEPTEMBER 30, THROUGH
------------------- SEPTEMBER 30,
1998 1997 1996
-------- -------- -------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $15.18 $ 10.89 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(d)..... (.15) (.12) (.10)
Net realized and unrealized gain
(loss) on investment transactions.. .39 4.41 .99
-------- -------- --------
Total from investment operations... .24 4.29 .89
-------- -------- --------
LESS DISTRIBUTIONS:
Distributions from net realized
gains.............................. (1.31) -- --
-------- -------- --------
Net asset value, end of period...... $ 14.11 $ 15.18 $ 10.89
======== ======== ========
TOTAL RETURN(C): ................... 2.21 % 39.39 % 8.90 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $708,463 $419,405 $231,541
Average net assets (000)............ $557,823 $299,476 $162,412
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.83 % 1.84 % 1.98 %(b)
Expenses, excluding distribution
fees.............................. .83 % .84 % .98 %(b)
Net investment income (loss)....... (1.01)% (1.00)% (1.12)%(b)
Portfolio turnover rate............. 58 % 63 % 42 %
</TABLE>
- -----------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
8
<PAGE>
FINANCIAL HIGHLIGHTS--GROWTH FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS C SHARES)
The following financial highlights for the two years ended September 30, 1998
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the period from November 2, 1995 through September 30, 1996 have been
audited by other independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class C share of common
stock of the Growth Fund outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. Further
performance information is contained in the annual report, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."
<TABLE>
<CAPTION>
CLASS C
---------------------------------------
YEAR ENDED NOVEMBER 2, 1995(A)
SEPTEMBER 30, THROUGH
----------------- SEPTEMBER 30,
1998 1997 1996
------- ------- -------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.. $ 15.18 $ 10.89 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(d)....... (.15) (.12) (.10)
Net realized and unrealized gain
(loss) on investment transactions.... .39 4.41 .99
------- ------- -------
Total from investment operations..... .24 4.29 .89
------- ------- -------
LESS DISTRIBUTIONS:
Distributions from net realized gains. (1.31) -- --
------- ------- -------
Net asset value, end of period........ $ 14.11 $ 15.18 $ 10.89
======= ======= =======
TOTAL RETURN(C): ..................... 2.21 % 39.39 % 8.90 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $45,126 $25,134 $15,281
Average net assets (000).............. $35,337 $18,248 $12,550
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.83 % 1.84 % 1.98 %(b)
Expenses, excluding distribution
fees................................ .83 % .84 % .98 %(b)
Net investment income (loss)......... (1.01)% (1.00)% (1.12)%(b)
Portfolio turnover rate............... 58% 63 % 42 %
</TABLE>
- -----------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
9
<PAGE>
FINANCIAL HIGHLIGHTS--GROWTH FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS Z SHARES)
The following financial highlights for the two years ended September 30, 1998
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the period from April 15, 1996 through September 30, 1996 have been
audited by other independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class Z share of common
stock of the Growth Fund outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. Further
performance information is contained in the annual report, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
----------------------------------------
YEAR ENDED APRIL 15, 1996(A)
SEPTEMBER 30, THROUGH
--------------------- SEPTEMBER 30,
1998 1997 1996
---------- -------- -----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. $ 15.45 $ 10.98 $ 10.32
---------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (d)..... -- -- (.02)
Net realized and unrealized gain
(loss) on investment transactions... .39 4.47 .68
---------- -------- --------
Total from investment operations.... .39 4.47 .66
---------- -------- --------
LESS DISTRIBUTIONS:
Distributions from net realized
gains............................... (1.31) -- --
---------- -------- --------
Net asset value, end of period....... $ 14.53 $ 15.45 $ 10.98
========== ======== ========
TOTAL RETURN(C): .................... 3.22% 40.71% 6.40 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $1,021,903 $609,869 $362,416
Average net assets (000)............. $ 810,296 $455,684 $ 26,829
Ratios to average net assets:
Expenses, including distribution
fees............................... .83% .84% .98 %(b)
Expenses, excluding distribution
fees............................... .83% .84% .98 %(b)
Net investment income (loss)........ (.01)% -- (.12)%(b)
Portfolio turnover rate.............. 58% 63% 42 %
</TABLE>
- -----------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
10
<PAGE>
FINANCIAL HIGHLIGHTS--GROWTH & INCOME FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A, CLASS B, CLASS C AND CLASS Z SHARES)
The following financial highlights for Class A, Class B, Class C and Class Z
shares for the fiscal year ended September 30, 1998 and the period from
November 7, 1996 through September 30, 1997 have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class A,
Class B, Class C and Class Z share of common stock of the Growth & Income
Fund, respectively, outstanding, total return, ratios to average net assets
and other supplemental data for the periods indicated. The information has
been determined based on data contained in the financial statements. Further
performance information is contained in the annual report, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
-------------------------- -------------------------- -------------------------- --------------------------
YEAR NOV. 7, 1996(A) YEAR NOV. 7, 1996(A) YEAR NOV. 7, 1996(A) YEAR NOV. 7, 1996(A)
ENDED THROUGH ENDED THROUGH ENDED THROUGH ENDED THROUGH
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1998 1997 1998 1997 1998 1997 1998 1997
--------- --------------- --------- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 12.89 $ 10.00 $ 12.86 $ 10.00 $12.86 $10.00 $12.93 $10.00
------- ------- ------- ------- ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income.......... .15 .09 .06 .02 .06 .02 .17 .10
Net realized and
unrealized gain
on investment
transactions.... (1.32) 2.87 (1.31) 2.86 (1.31) 2.86 (1.33) 2.92
------- ------- ------- ------- ------ ------ ------ ------
Total from
investment
operations..... (1.17) 2.96 (1.25) 2.88 (1.25) 2.88 (1.16) 3.02
------- ------- ------- ------- ------ ------ ------ ------
LESS
DISTRIBUTIONS:
Dividends from
net investment
income.......... (.12) (.07) (.03) (.02) (.03) (.02) (.15) (.09)
Distributions
from net
realized gains.. (.62) -- (.62) -- (.62) -- (.62) --
------- ------- ------- ------- ------ ------ ------ ------
Total
distributions.. (.74) (.07) (.65) (.02) (.65) (.02) (.77) (.09)
------- ------- ------- ------- ------ ------ ------ ------
Net asset value,
end of period... $ 10.98 $ 12.89 $ 10.96 $ 12.86 $10.96 $12.86 $11.00 $12.93
======= ======= ======= ======= ====== ====== ====== ======
TOTAL
RETURN(B): ..... (9.40)% 29.72% (10.01)% 28.83% (10.01)% 28.83% (9.31%) 30.30%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period (000). $31,339 $34,846 $84,751 $87,558 $7,124 $7,111 $1,836 $ 609
Average net
assets (000).... $35,145 $27,008 $93,465 $62,575 $7,734 $5,631 $1,374 $ 227
Ratios to average
net assets:
Expenses,
including
distribution
fees........... 1.31% 1.58%(c) 2.06% 2.33%(c) 2.06% 2.33%(c) 1.06% 1.33%(c)
Expenses,
excluding
distribution
fees........... 1.06% 1.33%(c) 1.06% 1.33%(c) 1.06% 1.33%(c) 1.06% 1.33%(c)
Net investment
income......... 1.20% .90%(c) .46% .15%(c) .46% .15%(c) 1.54% 1.15%(c)
Portfolio
turnover rate... 99% 55% 99% 55% 99% 55% 99% 55%
</TABLE>
- -----------
(a) Commencement of investment operations.
(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 returns for periods of less than a full
year are not annualized.
(c) Annualized.
11
<PAGE>
HOW THE FUNDS INVEST
INVESTMENT OBJECTIVES AND POLICIES
GROWTH FUND
THE GROWTH FUND'S INVESTMENT OBJECTIVE 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. THERE CAN BE NO ASSURANCE THAT THE
GROWTH FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information.
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. COMPANIES WITH MARKET CAPITALIZATIONS IN
EXCESS OF $1 BILLION ARE GENERALLY CONSIDERED MEDIUM TO LARGE CAPITALIZATION
COMPANIES. Stocks will be selected on a company-by-company basis primarily
through the use of fundamental analysis. The Growth Fund's investment adviser
looks for companies that have demonstrated growth in earnings and sales, high
returns on equity and assets, or other strong financial characteristics and,
in the judgment of the investment adviser, are attractively valued. These
companies tend to have a unique market niche, a strong new product profile or
superior management.
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.
The effort to achieve superior investment return necessarily involves a risk
of exposure to declining values. Securities in which the Growth Fund may
primarily invest have historically been more volatile than the S&P 500 Index.
Accordingly, during periods when stock prices decline generally, it can be
expected that the value of the Growth Fund will decline more than market
indices.
Securities of the kinds of companies in which the Growth Fund invests may be
subject to significant price fluctuation and above-average risk. In addition,
companies achieving an earnings growth rate higher than that of S&P 500
companies tend to reinvest their earnings rather than distribute them. As a
result, the Growth Fund is not likely to receive significant dividend income
on its portfolio securities. Accordingly, an investment in the Growth Fund
should not be considered as a complete investment program and may not be
appropriate for all investors.
* * * *
GROWTH & INCOME FUND
THE GROWTH & INCOME FUND'S PRIMARY INVESTMENT OBJECTIVE 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. THERE CAN BE NO ASSURANCE THAT THE GROWTH &
INCOME FUND'S OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information.
12
<PAGE>
UNDER NORMAL MARKET CONDITIONS, THE GROWTH & INCOME FUND WILL BE PRIMARILY
INVESTED IN A DIVERSIFIED PORTFOLIO OF COMMON STOCKS. THE GROWTH & INCOME FUND
MAY ALSO INVEST IN PREFERRED STOCKS AND SECURITIES CONVERTIBLE INTO COMMON
STOCK. Stocks will be selected on a company-by-company basis generally through
the use of fundamental analysis. The Growth & Income Fund's investment adviser
looks for companies that have the potential for growth in earnings and
dividends and, in the judgment of the investment adviser, are attractively
valued.
The Growth & Income Fund invests primarily in common stocks of established
companies with growth prospects which are, in the opinion of the investment
adviser, underappreciated by the market. These may include companies that are
experiencing important changes in their business structure and management
philosophy. The ability of the investment adviser to successfully identify
these changes will be an important factor in the Growth & Income Fund's
performance record. Also, the Growth & Income Fund's portfolio holdings may be
characterized by volatility somewhat greater than the overall market.
Additionally, although current income is a secondary objective, some of the
Growth & Income Fund's holdings may pay little or no dividend income.
The Growth & Income Fund also may invest in (i) other equity-related
securities, (ii) equity and debt securities of foreign issuers (limited to 20%
of total assets), including ADRs, (iii) investment grade fixed-income
securities, (iv) obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and (v) fixed-income securities rated below
investment grade (limited to 10% of total assets). Under normal market
conditions, the Growth & Income Fund will not invest more than 30% of its
total assets in fixed-income securities, including corporate and other debt
obligations and U.S. Government securities. The Growth & Income Fund also may
engage in short selling.
* * * *
Each Fund may purchase and sell put and call options on equity securities,
stock indices and foreign currencies, purchase and sell futures contracts on
stock indices and foreign currencies and options thereon and enter into
foreign currency forward contracts to hedge its portfolio and to attempt to
enhance return. Each Fund may also lend its portfolio securities, enter into
repurchase agreements and purchase securities on a when-issued and delayed
delivery basis.
Each Fund reserves the right as a defensive measure to hold temporarily
other types of securities without limit, including high quality commercial
paper, bankers' acceptances, non-convertible debt securities (corporate and
government) or government and high quality money market securities of U.S. and
non-U.S. issuers, or cash (foreign currencies or U.S. dollars), in such
proportions as, in the opinion of Jennison, prevailing market, economic or
political conditions warrant. Each Fund also may temporarily hold cash and
invest in high quality foreign or domestic money market instruments pending
investment of proceeds from new sales of Fund shares or to meet ordinary daily
cash needs. See "Other Investments and Policies" below.
As with an investment in any mutual fund, an investment in any Fund can
decrease in value and you can lose money.
EACH FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE RESPECTIVE
FUND'S OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT
OF 1940, AS AMENDED (INVESTMENT COMPANY ACT). INVESTMENT POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
13
<PAGE>
THE FOLLOWING POLICIES APPLY TO EACH FUND UNLESS OTHERWISE NOTED.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in securities issued or guaranteed by the U.S. Treasury
or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the issuing agency. See
"Investment Objectives and Policies--U.S. Government Securities" in the
Statement of Additional Information.
MORTGAGE-BACKED SECURITIES--GROWTH FUND ONLY. Growth Fund may invest in
mortgage-backed securities and other derivative mortgage products, including
those representing an undivided ownership interest in a pool of mortgages,
e.g., Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
certificates where the U.S. Government or its agencies or instrumentalities
guarantees the payment of interest and principal of these securities. These
guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do these guarantees
extend to the yield or value of the Fund's shares. See "Investment Objectives
and Policies--U.S. Government Securities" in the Statement of Additional
Information. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal
payments from the mortgages underlying the certificate, net of certain fees.
Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a
period of rising interest rates. Accordingly, amounts available for
reinvestment by either Fund are likely to be greater during a period of
declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Mortgage-backed
securities may decrease in value as a result of increases in interest rates
and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment.
COLLATERALIZED MORTGAGE OBLIGATIONS--GROWTH FUND ONLY. Growth Fund may
purchase collateralized mortgage obligations (CMOs) issued by agencies or
instrumentalities of the U.S. Government. A CMO is backed by a portfolio of
mortgages or mortgage-backed securities. The issuer's obligation to make
interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed securities. The issuer of a series of CMOs may
elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All
future references to CMOs include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the underlying mortgage assets may be allocated among the several classes of a
CMO series in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a
more predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities.
Growth Fund also may invest in mortgage-backed security strips (MBS strips)
issued by the U.S. Government or its agencies or instrumentalities. MBS strips
are usually structured with two classes that receive different proportions of
the interest and principal distributions on a pool of mortgage assets. A
common type of stripped mortgage security will have one class receiving some
of the interest and most of the principal from the mortgage assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). The
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yields to maturity on IOs and POs are sensitive to the expected or anticipated
rate of principal payments (including prepayments) on the related underlying
mortgage assets, and principal payments may have a material effect on yield to
maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may not fully recoup its
initial investment in IOs. Conversely, if the underlying mortgage assets
experience less than anticipated prepayments of principal, the yield on POs
could be materially adversely affected.
In reliance on rules and interpretations of the Securities and Exchange
Commission (Commission), the Growth Fund's investments in certain qualifying
CMOs and REMICs are not subject to the Investment Company Act's limitation on
acquiring interests in other investment companies. See "Investment Objectives
and Policies--Mortgage-Related Securities" in the Statement of Additional
Information.
CORPORATE AND OTHER DEBT OBLIGATIONS
Each Fund may invest in investment grade corporate and other debt
obligations of domestic and foreign issuers, including convertible securities
and money market instruments. Bonds and other debt securities are used by
issuers to borrow money from investors. The issuer pays the investor a fixed
or variable rate of interest and must repay the amount borrowed at maturity.
Investment grade debt securities are rated within the four highest quality
grades as determined by Moody's Investors Service, Inc. (Moody's) (currently
Aaa, Aa, A and Baa for bonds) or Standard & Poor's Ratings Group (S&P)
(currently AAA, AA, A and BBB for bonds), or comparably rated by another
nationally recognized statistical rating organization (NRSRO) or in unrated
securities which are of equivalent quality in the opinion of Jennison. If a
security (or issuer) held by the Growth Fund is assigned a rating below
investment grade (or, in the view of Jennison, if a security has declined in
credit quality so that it is comparable to a security rated below investment
grade), Jennison will seek to dispose of the security as soon as reasonably
practicable. Securities rated Baa by Moody's, although considered to be
investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. Such lower
rated securities are subject to a greater risk of loss of principal and
interest.
NON-INVESTMENT GRADE FIXED-INCOME SECURITIES--GROWTH & INCOME FUND ONLY. Up
to 10% of the total assets of the Growth & Income Fund may be invested in non-
investment grade fixed-income securities. Non-investment grade fixed-income
securities (those rated below Baa by Moody's or BBB by S&P or comparably rated
by another NRSRO or unrated securities determined by Jennison to be of
comparable quality) have speculative characteristics (including the
possibility of default or bankruptcy of the issuers of such securities, market
price volatility based upon interest rate sensitivity, questionable
creditworthiness and relative liquidity of the secondary trading market).
Because these securities have been found to be more sensitive to adverse
economic changes or individual corporate developments and less sensitive to
interest rate changes than higher-rated investments, an economic downturn
could disrupt the market for these securities and adversely affect the value
of these securities and the ability of issuers to repay principal and
interest. The Growth & Income Fund may not invest in fixed-income securities
rated lower than Ca by Moody's or CC by S&P or comparably rated by another
NRSRO. These securities are speculative to a high degree. See "Risk Factors
Relating to Investing in Debt Securities Rated Below Investment Grade (Junk
Bonds)--Growth & Income Fund Only" below.
EQUITY-RELATED SECURITIES. Each Fund may invest in equity-related
securities. Equity-related securities include common stocks, preferred stocks,
securities convertible or exchangeable for common stocks or preferred stocks,
equity investments in partnerships, joint ventures, other forms of non-
corporate investments, American Depositary Receipts (ADRs) and American
Depositary Shares (ADSs), and warrants and rights exercisable for equity
securities. See "Convertible Securities, Warrants and Rights" below.
ADRs and ADSs are U.S. dollar-denominated certificates or shares issued by a
U.S. bank or trust company and represent the right to receive securities of a
foreign issuer deposited in a domestic bank or foreign branch of a U.S. bank
and traded on a U.S. exchange or in an over-the-counter market. Generally,
ADRs and ADSs are in registered form. There are no fees imposed on the
purchase or sale of ADRs when purchased from the issuing bank or trust company
in the
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initial underwriting, although the issuing bank or trust company may impose
charges for the collection of dividends and the conversion of ADRs or ADSs
into the underlying securities. Investment in ADRs and ADSs has certain
advantages over direct investment in the underlying foreign securities since:
(i) ADRs and ADSs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (ii) issuers whose securities are represented by ADRs or ADSs
are usually subject to comparable auditing, accounting and financial reporting
standards as domestic issuers.
CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS
A CONVERTIBLE SECURITY IS A BOND, DEBENTURE, CORPORATE NOTE, PREFERRED STOCK
OR OTHER SIMILAR SECURITY THAT MAY BE CONVERTED AT A STATED PRICE WITHIN A
SPECIFIED PERIOD OF TIME INTO A CERTAIN QUANTITY OF THE COMMON STOCK OR OTHER
EQUITY SECURITIES OF THE SAME OR A DIFFERENT ISSUER. A warrant or right
entitles the holder to purchase equity securities at a specific price for a
specific period of time. Convertible securities are senior to common stocks in
a corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation dependent upon a market price advance
in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
In recent years, convertible securities have been developed which combine
higher or lower current income with options and other features. Each Fund may
invest in these types of convertible securities.
The Growth Fund may invest in convertible securities which are rated
investment grade or in unrated securities of comparable quality. The Growth &
Income Fund may invest in convertible securities which are rated below
investment grade or in unrated securities of comparable quality. See "Risk
Factors Relating to Investing in Debt Securities Rated Below Investment Grade
(Junk Bonds)--Growth & Income Fund Only" below.
SECURITIES OF FOREIGN ISSUERS
Each Fund may invest a portion of its assets in equity securities and fixed-
income securities of foreign issuers (denominated in either U.S. or foreign
currency). ADRs and ADSs (both of which are U.S. dollar-denominated
certificates issued by a U.S. bank or trust company that represent the right
to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. bank) are not included in any limitation on
investment in foreign securities.
MONEY MARKET INSTRUMENTS
Each Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic
and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar denominated or denominated in a foreign currency. Money market
instruments typically have a
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maturity of one year or less as measured from the date of purchase. Each Fund
may invest in money market instruments without limit for temporary defensive
and cash management purposes. To the extent a Fund otherwise invests in money
market instruments, it is subject to the limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
Each Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. Each 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. No Fund will purchase portfolio securities when borrowings exceed
5% of the value of its total assets. See "Investment Objectives and Policies--
Borrowing" in the Statement of Additional Information.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. A
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss. See "Investment Objectives and Policies--
Repurchase Agreements" in the Statement of Additional Information.
ILLIQUID SECURITIES
Each Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and privately placed commercial paper that have a
readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors. The
Fund's investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
PORTFOLIO TURNOVER
Each Fund's portfolio turnover rate is not expected to exceed 100%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
respective Fund. See "Portfolio Transactions and Brokerage" in the Statement
of Additional Information. In addition, high portfolio turnover may result in
increased short-term capital gains which, when distributed to shareholders,
are treated as ordinary income. See "Taxes, Dividends and Distributions."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by a Fund with
payment and delivery
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taking place in the future in order to secure what is considered to be an
advantageous price and/or yield to the Fund at the time of entering into the
transaction. While the Funds will only purchase securities on a when-issued or
delayed delivery basis with the intention of acquiring the securities, the
Funds may sell the securities before the settlement date, if it is deemed
advisable. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, the Fund will record the transaction
and thereafter reflect the value, each day, of such security in determining
the net asset value of the Fund. At the time of delivery of the securities,
the value may be more or less than the purchase price. The Funds' Custodian
will segregate for the relevant Fund cash or other liquid assets having a
value equal to or greater than such Fund's purchase commitments. Subject to
this requirement, the Funds may purchase securities on such basis without
limit. See "Investment Objectives and Policies--When-Issued and Delayed
Delivery Securities" in the Statement of Additional Information.
SECURITIES LENDING
Each Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral (which may
include a secured letter of credit) in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which is
segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. As a matter
of fundamental policy, neither Fund may lend more than 30% of the value of its
total assets. See "Investment Objectives and Policies--Lending of Securities"
in the Statement of Additional Information. The Funds may pay reasonable
administration and custodial fees in connection with a loan.
SHORT SALES
Each Fund may make short sales "against-the-box." A short sale is against-
the-box when a Fund enters into a short sale of a security which the Fund owns
or has the right to obtain at no added cost. No more than 25% of the Fund's
net assets (determined at the time of the short sale against-the-box) may be
subject to such 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. To complete such a transaction, the
Fund must 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 with its Custodian cash or other liquid assets at such a level that
(i) the amount segregated 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 pay in connection with a short sale. No more than 25% of the
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. See "Investment Objectives and
Policies--Short Sales" in the Statement of Additional Information.
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RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN ANY FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBLE IMPOSITION OF EXCHANGE
CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may be subject
to greater fluctuations in price than securities issued by U.S. corporations
or issued or guaranteed by the U.S. Government, its instrumentalities or
agencies. In addition, there may be less publicly available information about
a foreign company than about a domestic company. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic companies. There is
generally less government regulation of securities exchanges, brokers and
listed companies abroad than in the United States and there is a possibility
of expropriation, confiscatory taxation or diplomatic developments which could
affect investment.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUNDS'
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are
generally higher than U.S. brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Funds' securities
denominated in that currency. Such changes also will affect the Funds' income
and distributions to shareholders. In addition, although a Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after a Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time a Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred. A Fund may, but need not, enter into forward foreign currency
exchange contracts, options on foreign currencies and futures contracts on
foreign currencies and related options, for hedging purposes, including:
locking-in the U.S. dollar price of the purchase or sale of securities
denominated in a foreign currency; locking-in the U.S. dollar equivalent of
dividends to be paid on such securities which are held by the Fund; and
protecting the U.S. dollar value of such securities which are held by the
Fund.
SHAREHOLDERS SHOULD BE AWARE THAT INVESTING IN THE EQUITY MARKETS OF
DEVELOPING COUNTRIES INVOLVES EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS
DIVERSE AND MATURE, AND TO POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE
LESS STABILITY, THAN THOSE OF DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE
INDICATES THAT THE MARKETS OF DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE
THAN THE MARKETS OF DEVELOPED COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS
IN FOREIGN SECURITIES, DESCRIBED ABOVE, MAY BE GREATER WITH RESPECT TO
INVESTMENTS IN DEVELOPING COUNTRIES.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)--GROWTH & INCOME FUND ONLY
The Growth & Income Fund may invest up to 10% of its total assets in non-
investment grade debt securities or in unrated securities of comparable
quality. Fixed-income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations (credit
risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). Lower rated or unrated
(i.e., high yield or high risk) securities (commonly referred to as junk
bonds) are more likely to react to
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developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of
interest rates. The investment adviser considers both credit risk and market
risk in making investment decisions for this Fund.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities and, from
time to time, it may be more difficult to value high yield securities than
more highly rated securities. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer. As a
result, the investment adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating the Growth & Income Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, Growth &
Income Fund may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. If Growth & Income Fund
experiences unexpected net redemptions, it may be forced to sell its higher
rated securities, resulting in a decline in the overall credit quality of the
debt portion of its portfolio and increasing the exposure of Growth & Income
Fund to the risks of high yield securities.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
EACH FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. A FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY IF THE FUND IS
UNSUCCESSFUL IN ITS USE OF THESE STRATEGIES. These strategies currently
include the use of options, forward currency exchange contracts and futures
contracts and options thereon. A Fund's ability to use these strategies may be
limited by market conditions, regulatory limits and tax considerations and
there can be no assurance that any of these strategies will succeed. See
"Investment Objectives and Policies" and "Taxes, Dividends and Distributions"
in the Statement of Additional Information. Jennison does not intend to buy
all of these instruments or use all of these strategies to the full extent
permitted unless it believes that doing so will help a Fund achieve its
objectives. New financial products and risk management techniques continue to
be developed and a Fund may use these new investments and techniques to the
extent consistent with its investment objectives and policies.
OPTIONS TRANSACTIONS
EACH FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON EQUITY
SECURITIES, STOCK INDICES (E.G., S&P 500) AND FOREIGN CURRENCIES THAT ARE
TRADED ON U.S. OR FOREIGN SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER
(OTC) MARKET TO ENHANCE RETURN OR TO HEDGE ITS PORTFOLIO. A Fund may write put
and call options to generate additional income through the receipt of
premiums, purchase put options in an effort to protect the value of securities
(or currencies) that it owns against a decline in market value and purchase
call options in an effort to protect against an increase in the price of
securities (or currencies) it intends to purchase. The Funds may also purchase
put and call options to offset previously written put and call options of the
same series. See "Investment Objectives and Policies--Options on Securities"
in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY SUBJECT
TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The
writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the
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exercise price. When a Fund writes a call option, the Fund gives up the
potential for gain on the underlying securities or currency in excess of the
exercise price of the option during the period that the option is open. The
Funds will write only "covered" call options for which they (i) own an
offsetting position in the underlying security or currency or (ii) segregates
cash or other liquid assets with a value sufficient at all times to cover
their respective obligations.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. A Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
The Funds will write only put options for which they (i) own an offsetting
position in the underlying security or currency or (ii) segregate cash or
other liquid assets with a value sufficient at all times to cover their
respective obligations.
FOREIGN CURRENCY FORWARD CONTRACTS
EACH FUND MAY ENTER INTO FOREIGN CURRENCY FORWARD CONTRACTS TO PROTECT THE
VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY EXCHANGE
RATES. The Funds may enter into such contracts on a spot, i.e., cash, basis at
the rate then prevailing in the currency exchange market or on a forward
basis, by entering into a forward contract to purchase or sell currency. A
forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract at a price set on the
date of the contract.
THE FUNDS' DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of a Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although
there are no limits on the number of forward contracts which the Funds may
enter into, the Funds may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of foreign currency)
of the securities being hedged. See "Investment Objectives and Policies--Risks
Related to Foreign Currency Forward Contracts" in the Statement of Additional
Information.
FUTURES CONTRACTS AND OPTIONS THEREON
EACH FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(CFTC). A FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. The Growth Fund may purchase and sell
futures contracts on stock indices and foreign currencies. The Growth & Income
Fund may purchase and sell futures contracts on debt securities, including
U.S. Government securities, aggregates of debt securities, stock indices and
foreign currencies. A futures contract is an agreement to purchase or sell an
agreed amount of securities or currencies at a set price for delivery in the
future. A stock index futures contract is an agreement to purchase or sell
cash equal to a specific dollar amount times the difference between the value
of a specific stock index at the close of the last trading day of the contract
and the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. The Funds may purchase and sell
futures contracts or related options as a hedge against changes in market
conditions.
Neither Fund may purchase or sell futures contracts and related options to
attempt to enhance return if immediately thereafter the sum of the amount of
initial margin deposits on a Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the market value
of the Fund's total assets. Each Fund may purchase and
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sell futures contracts and related options, without limitation, for bona fide
hedging purposes in accordance with regulations of the CFTC (i.e., to reduce
certain risks of its investments). The total contract value of all futures
contracts sold will not exceed the total market value of a Fund's investments.
Futures contracts and related options are generally subject to segregation
requirements of the Commission and coverage requirements of the CFTC. If a
Fund does not hold the security or currency underlying the futures contract,
it will be required to segregate on an ongoing basis with its Custodian cash
or other liquid assets having an amount at least equal to its obligations with
respect to such futures contracts. The Fund may place and maintain cash,
securities and similar investments with a futures commission merchant in
amounts necessary to effect the Fund's transactions in exchange-traded futures
contracts and options thereon, provided certain conditions are satisfied.
THE FUNDS' SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies underlying the futures contract is imperfect and there is a
risk that the value of the securities or currencies underlying the futures
contract may increase or decrease at a greater rate than the related futures
contracts resulting in losses to the Funds. Certain futures exchanges or
boards of trade have established daily limits on the amount that the price of
futures contracts or related options may vary, either up or down, from the
previous day's settlement price. These daily limits may restrict the Funds'
ability to purchase or sell certain futures contracts or related options on
any particular day.
The Funds' ability to enter into or close out futures contracts and options
thereon is limited by the requirements of the Internal Revenue Code of 1986,
as amended (Internal Revenue Code) for qualification as a regulated investment
company. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE
FUNDS WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. A FUND, AND
THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency or interest rate markets are
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, foreign currency and futures contracts and options on futures
contracts include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices
of the securities or currencies being hedged; (3) the fact that skills needed
to use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the risk that the counterparty may be
unable to complete the transaction 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 a portfolio
security at a disadvantageous time, due to the need for the Fund to maintain
"cover" or to segregate liquid assets in connection with hedging transactions.
See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
The Funds will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Funds will generally purchase OTC options only if management believes that the
other party to the options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will
continue to exist or that the other party will continue to make a market.
Thus, it may not be possible to close out an option or futures transaction.
The inability to close out options and futures positions also could have an
adverse impact on a Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by a Fund of margin deposits
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or collateral in the event of bankruptcy of a broker with whom the Fund has an
open position in an option, a futures contract or related option.
INVESTMENT RESTRICTIONS
The Funds are subject to certain investment restrictions which, like their
investment objectives, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
relevant Fund's outstanding voting securities as defined in the Investment
Company Act. See "Investment Restrictions" in the Statement of Additional
Information.
HOW THE FUNDS ARE MANAGED
THE COMPANY HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUNDS' MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON
MATTERS OF GENERAL POLICY. THE FUNDS' MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUNDS. EACH FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
For the fiscal year ended September 30, 1998, the Growth Fund's total
expenses as a percentage of average net assets for Class A, Class B, Class C
and Class Z shares were 1.08%, 1.83%, 1.83% and .83%, respectively. For the
fiscal year ended September 30, 1998, the Growth & Income Fund's total
expenses as a percentage of average net assets for Class A, Class B, Class C
and Class Z shares were 1.31%, 2.06%, 2.06% and 1.06%, respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE
MANAGER OF THE FUNDS AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF
.60 OF 1% OF EACH FUND'S AVERAGE DAILY NET ASSETS. PIFM is organized in New
York as a limited liability company. For the fiscal year ended September 30,
1998, the Growth Fund and Growth & Income Fund each paid management fees to
PIFM of .60 of 1% of the Fund's average net assets. See "Manager and
Subadvisers" in the Statement of Additional Information.
As of October 31, 1998, PIFM served as the manager to 67 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $68.2 billion.
Under the Management Agreement with the Company, PIFM manages the investment
operations of the Funds and also administers the Funds' corporate affairs. See
"Manager and Subadvisers" in the Statement of Additional Information.
SUBADVISER
JENNISON ASSOCIATES LLC (JENNISON, THE SUBADVISER OR THE INVESTMENT
ADVISER), 466 LEXINGTON AVENUE, NEW YORK, NEW YORK 10017, IS THE SUBADVISER TO
THE FUNDS. As of September 30, 1998, Jennison had approximately $39.3 billion
in assets under management for institutional and mutual fund clients.
PURSUANT TO A SUBADVISORY AGREEMENT WITH PIFM, JENNISON FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUNDS AND IS
COMPENSATED BY PIFM 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 EACH FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF $300 MILLION.
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Under the Subadvisory Agreement, Jennison, subject to the supervision of
PIFM, is responsible for managing the assets of the Funds in accordance with
each Fund's respective investment objective, investment program and policies.
Jennison determines what securities and other instruments are purchased and
sold for the Funds and is responsible for obtaining and evaluating financial
data relevant to the Funds.
DAVID POIESZ IS THE PORTFOLIO MANAGER OF THE GROWTH FUND AND PETER REINEMANN
IS THE ASSOCIATE PORTFOLIO MANAGER OF THE GROWTH FUND. Mr. Poiesz is
responsible for the day-to-day management of the Growth Fund. They are both
Directors of Jennison and have been involved with the Growth Fund since its
inception in 1995. Mr. Poiesz, an Executive Vice President of Jennison, joined
Jennison in 1983 as an equity research analyst and has been an equity
portfolio manager since 1991. Mr. Poiesz also serves as the Portfolio Manager
of the Prudential Jennison Portfolio of The Prudential Series Fund, Inc., a
registered investment company. Mr. Reinemann, a Senior Vice President of
Jennison, joined Jennison in 1992 as an associate portfolio manager. Prior to
that time, he served as a Vice President at Paribas Asset Management, Inc. Mr.
Reinemann is also associate portfolio manager of the Growth & Income Fund.
BRADLEY GOLDBERG IS THE PORTFOLIO MANAGER AND PETER REINEMANN IS THE
ASSOCIATE PORTFOLIO MANAGER OF THE GROWTH & INCOME FUND. Mr. Goldberg is an
Executive Vice President of Jennison and is responsible for the day-to-day
management of the Growth & Income Fund. Mr. Goldberg has managed the Growth &
Income Fund since its inception and has been employed as a portfolio manager
at Jennison since 1974. The biography of Mr. Reinemann appears above.
PIFM and Jennison are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE
COMPANY. IT IS A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities
Incorporated (Prudential Securities), One Seaport Plaza, New York, New York
10292, previously served as the distributor of the Funds' shares. It is an
indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUNDS UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING
EACH FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs
the expenses of distributing the Funds' Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Funds. These
expenses include commissions and account servicing fees paid to, or on account
of, Dealers or financial institutions which have entered into agreements with
the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of the
Distributor associated with the sale of each Fund's shares, including lease,
utility, communications and sales promotion expenses.
Under the Plans, the Funds are obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Funds
will not be obligated to pay any additional expenses. If the Distributor's
expenses are less than such distribution and service fees, it will retain its
full fees and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the
distribution, marketing, administrative and other services and activities
provided by Dealers with respect to the promotion of the sale of the Funds'
shares and the maintenance of related shareholder accounts.
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UNDER THE CLASS A PLAN, EACH FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has
voluntarily limited 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. This
voluntary waiver may be terminated at any time without notice.
UNDER THE CLASS B AND CLASS C PLANS, EACH FUND PAYS THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES AT AN
ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B AND
CLASS C SHARES. The Class B and Class C Plans provide for the payment to the
Distributor of (i) an asset-based sales charge of .75 of 1% of the average
daily net assets of the Class B and Class C shares, respectively, and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class
B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges."
For the fiscal year ended September 30, 1998, each Fund paid distribution
expenses of .25%, 1.00% and 1.00% of the average daily net assets of their
Class A, Class B and Class C shares, respectively. Each Fund records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Funds will be allocated to each such class of the respective
Fund based upon the ratio of sales of each such class to the sales of Class A,
Class B or Class C shares of such Fund other than expenses allocable to a
particular class. The distribution fee and sales charge of one class will not
be used to subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Company, including a
majority of the Directors who are not "interested persons" of the Company (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of a Fund. The Fund will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Funds under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to Dealers and other persons which
distribute shares of the Funds (including Class Z shares). Such payments may
be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of any Fund. In addition,
the Distributor has waived a portion of its distribution fee for the Class A
shares as described above under "Distributor." Fee waivers and expense
subsidies will increase a Fund's total return. These voluntary waivers may be
terminated at any time without notice. See "Performance Information" in the
Statement of Additional Information and "Fund Expenses" above.
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PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Funds provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Funds' portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Company. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent for the
Funds and in those capacities maintains certain books and records for the
Company. PMFS is a wholly-owned subsidiary of PIFM. Its mailing address is
P.O. Box 15005, New Brunswick, New Jersey 08906-5005.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Funds and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Funds,
the Manager, the Distributor, the Transfer Agent and the Custodian have
advised the Funds that they have been actively working on necessary changes to
their computer systems to prepare for the year 2000 and expect that their
systems, and those of outside service providers, will be adapted in time for
the event.
Additionally, issuers of securities generally as well as those purchased by
the Funds may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of securities held
by the Funds.
HOW EACH FUND VALUES ITS SHARES
EACH FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF EACH FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Company's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
Each Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of a Fund's portfolio securities do not materially affect its
NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any
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distribution and/or service fees. It is expected, however, that the NAV of the
four classes will tend to converge immediately after the recording of
dividends, if any, which will differ by approximately the amount of
distribution and/or service fee expense accrual differential among the
classes.
HOW THE FUNDS CALCULATE PERFORMANCE
FROM TIME TO TIME A FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL
RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The total return shows how much an
investment in a Fund would have increased (decreased) over a specified period
of time (i.e., one, five, or ten years or since inception of the Fund)
assuming that all distributions and dividends by the Fund were reinvested on
the reinvestment dates during the period and less all recurring fees. The
aggregate total return reflects actual performance over a stated period of
time. Average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. Average annual total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average
annual total return nor aggregate total return takes into account any federal
or state income taxes which may be payable upon redemption. The yield refers
to the income generated by an investment in a Fund over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage
of the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period. A Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., and other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information will be contained in each Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUNDS
EACH FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUNDS WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON NET INVESTMENT INCOME AND
NET CAPITAL GAINS, IF ANY, THAT THEY DISTRIBUTE TO THEIR RESPECTIVE
SHAREHOLDERS.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Funds will be required to be "marked-
to-market" for federal income tax purposes; that is, treated as having been
sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease
the amount of a Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's
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net capital gain. If currency fluctuation losses exceed other investment
company taxable income during a taxable year, distributions made by a Fund
during the year would be characterized as a return of capital to shareholders,
reducing the shareholder's basis in his or her Fund shares.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term capital gains (i.e., the excess of net short-term capital gains
over net long-term capital losses) distributed to shareholders will be taxable
as ordinary income to the shareholder whether or not reinvested. Any net
capital gains (i.e., the excess of net long-term capital gains over net short-
term capital losses) distributed to shareholders will be taxable as long-term
capital gains to the shareholder, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
federal long-term capital gains rate for individual shareholders is 20% and
the maximum statutory federal tax rate for ordinary income is 39.6%. The
maximum statutory federal long-term capital gains rate and the maximum
statutory federal tax rate for ordinary income for corporate shareholders
currently is 35%.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by each Fund will be treated
as received by shareholders on December 31 of the year the dividends are
declared. This rule applies to dividends declared by such Fund in October,
November or December of a calendar year, payable to shareholders of record on
a date in any such month, if such dividends are paid during January of the
following calendar year.
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. Dividends
attributable to foreign corporations, interest income, capital and currency
gain, gain or loss from Section 1256 contracts and income from certain other
sources will not be eligible for the corporate dividends-received deduction.
See "Taxes, Dividends and Distributions" in the Statement of Additional
Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends-received deduction.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, will be treated as a
long-term capital loss to the extent of any capital gain distributions
received by the shareholder. With respect to non-corporate shareholders, gain
or loss on shares held more than one year will be considered in determining a
holder's adjusted net capital gain subject to a maximum statutory tax rate of
20%.
The Funds have obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
any class of a Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Funds are required to withhold and
remit to the U.S. Treasury 31% of dividends, capital gain income and
redemption proceeds payable on the accounts of certain shareholders who fail
to furnish their correct tax identification numbers to the IRS on Form W-9 (or
IRS Form W-8 in the case of certain foreign shareholders) with the required
certifications regarding the shareholder's status under the federal income tax
law. Withholding at this rate is also required from dividends and capital
gains distributions (but not redemption proceeds) payable to shareholders who
are otherwise subject to backup withholding. Dividends of net investment
income and short-term gains paid to a foreign shareholder will generally be
subject to U.S. withholding tax at a rate of 30% (or lower treaty rate).
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Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUNDS EXPECT TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, SEMI-
ANNUALLY, AND EACH FUND EXPECTS TO MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN
EXCESS OF NET LONG-TERM CAPITAL LOSSES AT LEAST ANNUALLY. Dividends paid by
the Funds with respect to each class of shares, to the extent any dividends
are paid, will be calculated in the same manner, at the same time, on the same
day and will be in the same amount except that each class other than Class Z
will bear its own distribution and/or service fee charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A and
Class Z shares and lower dividends for Class A shares in relation to Class Z
shares. Distribution of net capital gains, if any, will be paid in the same
amount per share for each class of shares. See "How Each Fund Values its
Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE
RELEVANT FUND, BASED ON THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER
DATE AS THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN
WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE
SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services LLC, Attn: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. The Funds will notify their
respective shareholders after the close of the Funds' taxable year both of the
dollar amount and the taxable status of that year's dividends and
distributions on a per share basis.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE TO THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF A FUND.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE COMPANY WAS INCORPORATED IN MARYLAND ON AUGUST 10, 1995. THE COMPANY IS
AUTHORIZED TO ISSUE 3 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, DIVIDED INTO THREE SERIES OR PORTFOLIOS, PRUDENTIAL ACTIVE BALANCED
FUND, PRUDENTIAL JENNISON GROWTH FUND AND PRUDENTIAL JENNISON GROWTH & INCOME
FUND. EACH SERIES IS FURTHER DIVIDED INTO FOUR CLASSES OF SHARES, 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 THE COMPANY.
Each class of common stock of each Fund represents an interest in the same
assets of such Fund and is identical in all respects except that (i) each
class is subject to different sales charges and distribution and/or service
fees (except for Class Z shares, which are not subject to any sales charges
and distribution and/or service fees), which may affect performance, (ii) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (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 Company's Articles of Incorporation, the Board of
Directors may authorize the creation of additional series of common stock and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Board may determine.
The Company's expenses generally are allocated among its three series on the
basis of relative net assets at the time of allocation, except that expenses
directly attributable to a Fund are charged to such Fund.
29
<PAGE>
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of each Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Funds under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares (with the exception of
Class Z shares, which are not subject to any distribution or service fees).
Except for the conversion feature applicable to the Class B shares, there are
no conversion, preemptive or other subscription rights. In the event of
liquidation, each share of common stock of a Fund is entitled to its portion
of all of such Fund's assets after all debts and expenses of such Fund have
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of
those classes are likely to be lower than to Class A shareholders and to Class
Z shareholders, whose shares are not subject to any distribution and/or
service fees. The Company's shares do not have cumulative voting rights for
the election of Directors.
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE COMPANY WILL NOT BE REQUIRED TO HOLD MEETINGS
OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO
BE ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS
HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10%
OR MORE OF THE COMPANY'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE
REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Company with the
Commission under the Securities Act. Copies of the Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUNDS
YOU MAY PURCHASE SHARES OF THE FUNDS THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUSEC, OR DIRECTLY FROM EACH FUND
THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE
TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW
BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs sponsored by
Prudential Retirement Services should contact their client representative for
more information about Class Z shares. The purchase price is the NAV next
determined following receipt of an order in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Distributor, your Dealer or the Transfer Agent plus a sales
charge which, at your option, may be imposed either (i) at the time of
purchase (Class A or Class C shares) or (ii) on a deferred basis (Class B or
Class C shares). Class Z shares are offered to a limited group of investors at
net asset value without any sales charge. Payment may be made by wire, check
or through your brokerage account. See "Alternative Purchase Plan" below. See
also "How Each Fund Values its Shares."
The minimum initial investment for each Fund is $1,000 for Class A and Class
B shares and $2,500 for Class C shares, except that the minimum initial
investment for Class C shares may be waived from time to time. There is no
minimum initial investment requirement for Class Z shares. The minimum
subsequent investment is $100 for all classes, except for Class Z shares, for
which there is no such minimum. All minimum investment requirements are waived
for certain retirement and employee savings plans or custodial accounts for
the benefit of minors. For purchases through the Automatic Investment Plan,
the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
30
<PAGE>
Application forms can be obtained from the Transfer Agent, the Distributor
or your Dealer. If a stock certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares.
Shareholders who hold their shares through Prudential Securities will not
receive stock certificates.
Each Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your Dealer is responsible for forwarding payment promptly to the Funds. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Dealers may charge their customers a separate fee for processing purchases
and redemptions. In addition, transactions in shares of the Funds may be
subject to postage and handling charges imposed by your Dealer. Any such
charges are retained by the Dealer and are not remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of a Fund by wire, you
must complete an application and telephone PMFS to receive an account number
at (800) 225-1852 (toll-free). The following information will be requested:
your name, address, tax identification number, class election, dividend
distribution election, amount being wired and wiring bank. Instructions should
then be given by you to your bank to transfer funds by wire to State Street
Bank and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Jennison Growth Fund or
Prudential Jennison Growth & Income Fund, as the case may be, specifying on
the wire the account number assigned by PMFS and your name and identifying the
class in which you are eligible to invest (Class A, Class B, Class C or Class
Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Funds as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Jennison Growth
Fund or Prudential Jennison Growth & Income Fund, as the case may be, Class A,
Class B, Class C or Class Z shares and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing federal funds. The minimum amount which may be invested by wire is
$1,000.
ALTERNATIVE PURCHASE PLAN
EACH FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE
STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE,
THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge waived
of 5% of the public offering (currently being or reduced for certain
price charged at a rate purchases
of .25 of 1%)
CLASS B Maximum CDSC of 5% of the 1% Shares convert to Class A
lesser of the amount shares approximately seven
invested or the redemption years after purchase
proceeds; declines to zero
after six years
CLASS C Maximum initial sales charge 1% Shares do not convert to
of 1% of the public offering another class
price and maximum CDSC of 1%
of the lesser of the amount
invested or the redemption
proceeds on redemptions made
within 18 months of purchase
CLASS Z None Sold to a limited group of
None investors
</TABLE>
31
<PAGE>
The four classes of shares represent an interest in the same portfolio of
investments of such Fund and have the same rights, except that (i) each class
is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charge or
distribution and/or service fee), 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
"How to Exchange Your Shares" below. The income attributable to each class and
the dividends payable on the shares of each class will be reduced by the
amount of the distribution fee (if any) of each class. Class B and Class C
shares bear the expenses of a higher distribution fee which will generally
cause them to have higher expense ratios and to pay lower dividends than the
Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Funds will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Funds.
If you intend to hold your investment in a Fund for less than 4 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to an initial sales charge of 5% and Class B shares are subject to
a CDSC of 5% which declines to zero over a 6-year period, you should consider
purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the sales charge plus the cumulative annual distribution-related
fee on Class A shares would exceed those of the Class B and Class C shares if
you redeem your investment during this time period. In addition, more of your
money would be invested initially in the case of Class C shares, because of
the relatively low initial sales charge, and all of your money would be
invested initially in the case of Class B shares, which are sold at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related fee on Class A shares would be less than those of the Class B and
Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in
the case of Class C shares for the higher cumulative annual distribution-
related fee on those shares plus, in the case of Class C shares, the 1%
initial sales charge to exceed the initial sales charge plus the cumulative
annual distribution-related fees on Class A shares. This does not take into
account the time value of money, which further reduces the impact of the
higher Class B or Class C distribution-related fee on the investment,
fluctuations in NAV, the effect of the return on the investment over this
period of time or redemptions when the CDSC is applicable.
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<PAGE>
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES, UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
--------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire sales charge to Dealers. Dealers may
be deemed to be underwriters, as that term is defined under the federal
securities laws. The Distributor reserves the right, without prior notice to
any Dealer, to suspend or eliminate Dealer concessions or commissions.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
may pay Dealers, financial advisers and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the NAV 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 a
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code, "rabbi" trusts and non-qualified deferred compensation
plans that are sponsored by any employer that has a tax qualified benefit plan
with Prudential (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 the Transfer Agent
or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities 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 provides
administrative or recordkeeping services, provided that (i) the plan has at
least $1 million in existing assets or 250 eligible employees and (ii) the
applicable Fund is an available investment option. These plans include
pension, profit-sharing, stock-bonus or other
33
<PAGE>
employee benefit plans under Section 401 of the Internal Revenue Code and
deferred compensation and annuity plans under Sections 457 or 403(b)(7) of the
Internal Revenue Code and plans that participate in the PruArray Program
(benefit plan recordkeeping service) (hereafter referred to as a PruArray
Plan). All Benefit Plans of a company (or affiliated companies under common
control) for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold, provided that Prudential has
been notified in advance of the entitlement to the waiver of the sales charge
based on the aggregated assets. The term "existing assets" as used herein
includes stock issued by a plan sponsor, shares of Prudential Mutual Funds and
shares of certain unaffiliated mutual funds that participate in the PruArray
Plan (Participating Funds). "Existing assets" also include monies invested in
The Guaranteed Investment Account (GIA), a group annuity insurance product
issued by Prudential, the Guaranteed Insulated Separate Account, a separate
account offered 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 Plan provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at NAV 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
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
Transfer Agent and (ii) spouses of employees who open an IRA account with the
Transfer Agent. The program is offered to companies that have at least 250
eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray 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
the Distributor or the Transfer Agent, by the following persons: (a) officers
of the Prudential Mutual Funds (including the Funds), (b) employees of the
Distributor, Prudential Securities, 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 the Distributor, 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, (g) investors in Individual Retirement Accounts, provided the
purchase is made in a directed rollover to such Individual Retirement Account
or with the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services, and
further provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution, (h) orders placed by broker-dealers, investment
advisers or financial planners
34
<PAGE>
who have entered into an agreement with the Distributor, who place trades for
their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (e.g., mutual fund
"wrap" or asset allocation programs), and (i) orders placed by broker-dealers,
investment advisers or financial planners who place trades for customer
accounts if the accounts are linked to the master account of such broker-
dealer, investment adviser or financial planner and the broker-dealer,
investment adviser or financial planner charges its clients a separate fee for
its services (e.g., mutual fund "supermarket programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
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 in proper form by the Transfer Agent, your Dealer or the
Distributor plus, in the case of Class C shares, an initial sales charge of
1%. Redemptions of Class B and Class C shares may be subject to a CDSC. See
"How to Sell Your Shares--Contingent Deferred Sales Charges."
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to Dealers, financial advisers and
other persons which sell Class B shares at the time of sale. This facilitates
the ability of the Funds to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates
that it will recoup its advancement of sales commissions from the combination
of the CDSC and the distribution fee. See "How the Funds are Managed--
Distributor." In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, Dealers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 2% of the
purchase price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
Benefit Plans. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class C shares may be purchased at NAV by participants who are repaying the
loans made from such plans to the participant.
Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in the PruArray Plan
and other plans for which Prudential provides administrative or recordkeeping
services.
Investments of Redemption Proceeds from Other Investment
Companies. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (i)
investors purchasing shares through an account at Prudential Securities; (ii)
investors purchasing shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation (Prusec); and (iii) investors
purchasing shares through other Dealers. This waiver is not available to
investors who purchase shares directly from the Transfer Agent. You must
notify the Transfer Agent directly or through your Dealer if you are entitled
to this waiver and provide the Transfer Agent with such supporting documents
as it may deem appropriate.
35
<PAGE>
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 plans and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code and non-qualified
plans for which the relevant Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least
$50 million in defined contribution assets; (ii) participants in any fee-based
program or trust program sponsored by an affiliate of the Distributor which
includes mutual funds as investment options and for which the relevant Fund is
an available option; (iii) certain participants in the Medley Program (group
variable annuity contracts) sponsored by an affiliate of the Distributor for
whom Class Z shares of the Prudential Mutual Funds are an available option;
(iv) Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996, (a)
were Class Z shareholders of the Prudential Mutual Funds or (b) executed a
letter of intent to purchase Class Z shares of the Prudential Mutual Funds;
(v) current and former Directors/Trustees of the Prudential Mutual Funds
(including the Funds); (vi) employees of Prudential or Prudential Securities
who participate in an employer-sponsored employee savings plan; and (vii)
Prudential with an investment of $10 million or more. After a Benefit Plan
qualifies to purchase Class Z shares, all subsequent purchases will be for
Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay Dealers, financial advisers and other
persons which distribute shares a finders' fee from its own resources based on
a percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF A FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM (IN
ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION
WITH INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER. See "How Each Fund Values its Shares." In certain cases, however,
redemption proceeds will be reduced by the amount of any applicable CDSC, as
described below. See "Contingent Deferred Sales Charges" below. If you are
redeeming your shares through a Dealer, your Dealer must receive your sell
order before the Fund computes its NAV for that day (i.e., 4:15 P.M., New York
time) in order to receive that day's NAV. Your Dealer will be responsible for
furnishing all necessary documentation to the Distributor and may charge you
for its services in connection with redeeming shares of the Fund.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS
REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE
OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the respective Fund in care of its Transfer
Agent, Prudential Mutual Fund Services LLC, Attention: Redemption Services,
P.O. Box 15010, New Brunswick, New Jersey 08906-5010, the Distributor or to
your Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Prudential
Preferred Financial Services offices. In the case
36
<PAGE>
of redemptions from a PruArray Plan, if the proceeds of the redemption are
invested in another investment option of the plan, in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. If you
hold shares through a Dealer, payment for shares presented for redemption will
be credited to your account at your Dealer, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c)
when an emergency exists as a result of which disposal by a Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) during
any other period when the Commission, by order, so permits; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL A
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE
PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING
SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of a Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of such Fund, in lieu of cash, in conformity with
applicable rules of the Commission. Securities will be readily marketable and
will be valued in the same manner as a regular redemption. See "How Each Fund
Values its Shares." If your shares are redeemed in kind, you would incur
transaction costs in converting the assets into cash. The Company has,
however, elected to be governed by Rule 18f-1 under the Investment Company
Act, under which each Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period
for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Funds, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Funds
will give any such shareholder 60 days' prior written notice in which to
purchase sufficient additional shares to avoid such redemption. No CDSC will
be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of such Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will be on a pro rata basis. You must notify the Transfer Agent,
either directly or through the Distributor or your Dealer, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal tax treatment of any gain realized upon redemption. However, if
the redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes. For
more information on the rule that disallows a loss on the sale or exchange of
shares of each Fund which are replaced, see "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
37
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (or one year in the case of
shares purchased prior to November 2, 1998) will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and 18 months, in the case of Class C
shares (or one year in the case of shares purchased prior to November 2,
1998). A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Funds are
Managed--Distributor," "Waiver of Contingent Deferred Sales Charges--Class B
Shares" and "Waiver of Contingent Deferred Sales Charges--Class C Shares"
below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh....................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results generally in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of a Fund's shares made during the preceding six
years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
38
<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), or a trust, at the time of death or
initial determination or disability, provided that the shares were purchased
prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are: (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 (including a Roth IRA), a lump-sum or other distribution
after attaining age 59 1/2 or a periodic distribution based on life
expectancy; (iii) in the case of a Section 403(b) custodial account, a lump-
sum or other distribution after attaining age 59 1/2; and (iv) 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. Finally, the CDSC will be waived to the extent that
the proceeds from shares redeemed are invested in Prudential Mutual Funds, The
Guaranteed Investment Account, the Guaranteed Insulated Separate Account, or
units of The Stable Value Fund. The waiver does not apply in the case of a
tax-free rollover or transfer of assets, other than one following a separation
from service, i.e., following voluntary or involuntary termination of
employment or following retirement. Under no circumstances will the CDSC be
waived on redemptions resulting from the termination of a tax-deferred
retirement plan unless such redemptions otherwise qualify as a waiver as
described above. In the case of Direct Account and Prudential Securities or
Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted
will thereafter be subject to a CDSC without regard to the time such amounts
were previously invested. In the case of a 401(k) plan, the CDSC will also be
waived upon the redemption of shares purchased with amounts used to repay
loans made from the account to the participant and from which a CDSC was
previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Company.
You must notify the Transfer Agent either directly or through your Dealer,
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of
Additional Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account and units of The
Stable Value Fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a Dealer not affiliated with Prudential and for
whom the Dealer provides administrative or recordkeeping services.
39
<PAGE>
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 each Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How Each Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature is subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (i) that the dividends
and other distributions paid on Class A, Class B, Class C and Class Z shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Funds will continue to be subject, possibly
indefinitely, to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF A FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN OTHER
PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS,
SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS
B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C
AND CLASS Z SHARES, RESPECTIVELY,
40
<PAGE>
OF ANOTHER SERIES OF THE COMPANY OR ANOTHER FUND ON THE BASIS OF THE RELATIVE
NAV. No sales charge will be imposed at the time of exchange. Any applicable
CDSC payable upon the redemption of shares exchanged will be that imposed by
the fund in which shares are initially purchased and will be calculated from
the first day of the month after the initial purchase, excluding the time
shares were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for
tax purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call either Fund at (800) 225-1852 to execute a telephone exchange of shares,
on weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M.,
New York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUNDS NOR THEIR AGENTS WILL BE LIABLE FOR ANY
LOSS, LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares, will have
their Class B and Class C shares which are not subject to a CDSC and their
Class A shares exchanged for Class Z shares on a quarterly basis. Eligibility
for this exchange privilege will be calculated on the business day prior to
the date of the exchange. Amounts representing Class B or Class C shares which
are not subject to a CDSC include the following: (1) amounts representing
Class B or Class C shares acquired pursuant to the automatic reinvestment of
dividends and distributions, (2) amounts representing the increase in the net
asset value above the total 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,
Prusec or another Dealer that they are eligible for this special exchange
privilege.
41
<PAGE>
Participants in any fee-based program for which either Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they join the program. Upon leaving the program (whether voluntarily or
not), such Class Z shares (and, to the extent provided for in the program,
Class Z shares acquired through participation in the program) will be
exchanged for Class A shares at NAV. Similarly, participants in Prudential
Securities' 401(k) Plan for which the Fund's Class Z shares are an available
option and who wish to transfer their Class Z shares out of the Prudential
Securities 401(k) Plan following separation from service (i.e., voluntary or
involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Funds and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Funds reserve the right to refuse purchase orders and
exchanges by any person, group or commonly controlled accounts, if, in the
Manager's sole judgment, such person, group or accounts were following a
market timing strategy or were otherwise engaging in excessive trading (Market
Timers).
To implement this authority to protect each Fund and its shareholders from
excessive trading, a Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in a Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions of a Fund are
automatically reinvested in full and fractional shares of such Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through your Dealer, you should contact your Dealer.
. AUTOMATIC INVESTMENT PLAN (AIP). Under AIP you may make regular purchases
of a Fund's shares in amounts as little as $50 via an automatic debit to a
bank account or brokerage account (including a Command Account). For
additional information about this service, you may contact the Distributor,
your Dealer or the Transfer Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from your Dealer or the Transfer
Agent. If you are considering adopting such a plan, you should consult with
your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional
Information.
42
<PAGE>
. THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential makes
available optional group term life insurance coverage to purchasers of shares
of certain Prudential Mutual Funds which are held in an eligible brokerage
account. This insurance protects the value of your mutual fund investment for
your beneficiaries against market downturns. The insurance benefit is based on
the difference at the time of the insured's death between the "protected
value" and the then current market value of the shares. This coverage is not
available in all states and is subject to various restrictions and
limitations. For more complete information about this program, including
charges and expenses, please contact your Prudential representative.
. REPORTS TO SHAREHOLDERS. The Funds will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Funds will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to a Fund at
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey
07102-4077. In addition, monthly unaudited financial data are available upon
request from the Funds.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Company at
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey
07102-4077, or by telephone, at (800) 225-1852 (toll-free) or, from outside
the U.S.A. at (732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
43
<PAGE>
APPENDIX A--INFORMATION ABOUT JENNISON ASSOCIATES LLC
Jennison has been engaged in the equity investment management business since
1969. As of September 30, 1998, Jennison managed $39.3 billion in assets for
180 clients, including approximately $8.7 billion (22%) in mutual funds. Of
the $39.3 billion in assets, $22.5 billion in assets were in growth equity
portfolios for 100 clients, with an average account size of $167.8 million. As
of September 30, 1998, Jennison also managed $359 million in growth and income
portfolios, $1.5 billion in balanced portfolios, $4.2 billion in international
equity portfolios, and $10.8 billion in fixed-income portfolios.
Jennison has an experienced team of investment professionals. The following
chart shows the total number of equity professionals employed by Jennison, as
of September 30, 1998, including the total number of portfolio managers and
the total number of equity research analysts.
<TABLE>
<CAPTION>
AVERAGE YEARS
AVERAGE YEARS OF EXPERIENCE
NUMBER OF EXPERIENCE WITH JENNISON
------ ------------- -------------
<S> <C> <C>
16 Total Equity Professionals 18 11
5 Equity Portfolio Managers 25 17
8 Equity Research Analysts 13 5
</TABLE>
JENNISON'S GROWTH STRATEGY:
Growth stocks are stocks of companies that have long-term growth rates in
sales and earnings that are higher than those of the overall economy. Growth
stocks are generally more expensive than the average stock (sell at a higher
price/earnings ratio) because investors are often willing to pay a premium in
order to participate in the superior growth they expect from these companies.
Consequently, these stocks also entail somewhat higher risk if expectations
are not met.
Growth stock investing is subject to market risk. The returns from the S&P
500 Index for the past fifteen years have been particularly favorable from a
historical standpoint and there can be no assurance that this growth in the
overall stock market will continue. Securities in which the Growth Fund may
primarily invest have historically been more volatile than the S&P 500 Index.
Accordingly, during periods when stock prices are declining generally, it can
be expected that the value of the Growth Fund will decline more than market
indices.
Jennison seeks to select attractive growth companies. The Jennison portfolio
managers' challenge is to select about 60 stocks that are believed to have the
potential to be the best performers among the larger universe of growth
stocks. Consequently, a growth stock portfolio managed by Jennison normally
consists of companies that the firm believes will experience superior earnings
growth over the next 12 to 18 months, on both an absolute and relative basis,
and which appear reasonably valued relative to growth expectations. Of course,
there can be no assurance that these stocks will achieve their growth
potential.
GROWTH FUND PERFORMANCE:
Class A, B and C shares of the Growth Fund commenced investment operations
on November 2, 1995; Class Z shares of the Growth Fund commenced investment
operations on April 15, 1996. Aggregate total returns for the one year and
from inception periods ended September 30, 1998 were 3.02% and 58.55%, 2.21%
and 55.16%, 2.21% and 55.16% and 3.22% and 54.53% for Class A, B, C and Z
shares, respectively, and average annual total returns for the one year and
since inception periods ended September 30, 1998 were (2.13)% and 15.11%,
(2.79)% and 15.51%, 1.21% and 16.29% and 3.22% and 19.36% for Class A, B, C
and Z shares, respectively.
A-1
<PAGE>
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 Fund in
exchange solely for Class Z shares of the Fund (the Reorganization). The
investment objectives and policies of the Growth Stock Fund were substantially
similar to those of the 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, 1998, your average annual
total returns for the one, five and since inception (November 5, 1992) periods
ended September 30, 1998 would have been 3.22%, 17.08% and 18.09%,
respectively. In addition, the aggregate total returns for such periods would
have been 3.22%, 120.01% and 166.70%, respectively.
JENNISON'S GROWTH AND INCOME STRATEGY:
Jennison uses a bottom-up approach to research and select attractively
priced growth and income stocks. The Growth & Income Fund's stock holdings are
selected primarily on the basis of fundamental analysis. In considering a
stock for ownership, a company's underlying intermediate-term potential growth
in sales and earnings is a critical determining factor. Jennison's growth and
income investment team, in conjunction with Jennison's equity research
analysts, focuses on companies that combine superior current or perceived
future earnings dynamics with attractive valuation characteristics. The common
investment discipline that is required for all holdings is an attractive risk
versus reward relationship. Jennison believes that dividend growth will
develop as a result of improving fundamental characteristics. Of course, there
can be no assurance that the holdings in the portfolio will achieve the
investment objective of the Growth & Income Fund.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone either Fund at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
TAX-EXEMPT BOND
FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Funds
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
. Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by any Fund or the Distributor. This Prospectus does not
constitute an offer by any Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are Each Fund's Risk Factors and Special Characteristics?............ 2
FUND EXPENSES.............................................................. 5
FINANCIAL HIGHLIGHTS....................................................... 7
HOW THE FUNDS INVEST....................................................... 12
Investment Objectives and Policies........................................ 12
Other Investments and Policies............................................ 17
Risk Factors and Special Considerations of
Investing in Foreign Securities.......................................... 19
Risk Factors Relating to Investing in Debt
Securities Rated Below Investment Grade (Junk Bonds)..................... 19
Hedging and Return Enhancement Strategies................................. 20
Investment Restrictions................................................... 23
HOW THE FUNDS ARE MANAGED.................................................. 23
Manager................................................................... 23
Subadviser................................................................ 23
Distributor............................................................... 24
Fee Waivers and Subsidy................................................... 25
Portfolio Transactions.................................................... 26
Custodian and Transfer and Dividend Disbursing Agent...................... 26
Year 2000 Readiness Disclosure............................................ 26
HOW EACH FUND VALUES ITS SHARES............................................ 26
HOW THE FUNDS CALCULATE PERFORMANCE........................................ 27
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 27
GENERAL INFORMATION........................................................ 29
Description of Common Stock............................................... 29
Additional Information.................................................... 30
SHAREHOLDER GUIDE.......................................................... 30
How to Buy Shares of the Funds............................................ 30
Alternative Purchase Plan................................................. 31
How to Sell Your Shares................................................... 36
Conversion Feature--Class B Shares........................................ 40
How to Exchange Your Shares............................................... 40
Shareholder Services...................................................... 42
APPENDIX A--INFORMATION ABOUT JENNISON ASSOCIATES LLC...................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... B-1
</TABLE>
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MF172A
<TABLE>
<S> <C>
Growth Fund Growth & Income Fund
CUSIP Nos.: CUSIP Nos.:
Class A: 74437E 10 7 Class A: 74437E 50 3
Class B: 74437E 20 6 Class B: 74437E 60 2
Class C: 74437E 30 5 Class C: 74437E 70 1
Class Z: 74437E 40 4 Class Z: 74437E 80 0
</TABLE>
Prudential Jennison Growth Fund and Prudential Jennison Growth & Income Fund
PROSPECTUS
November 30, 1998
www.prudential.com
[LOGO] Prudential Investments
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Statement of Additional Information dated November 30, 1998
The Prudential Investment Portfolios, Inc. (the Company) is an open-end,
diversified, management investment company consisting of three series:
Prudential 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 income and long-
term growth of capital by investing in a portfolio of equity, fixed-income and
money market securities which is actively managed to capitalize on
opportunities created by perceived misvaluation. 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. 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 Active Balanced Fund's Prospectus and the Prospectus
of Growth Fund and Growth & Income Fund, each dated November 30, 1998, copies
of which may be obtained from the Company upon request.
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
General Information........................................... B-2
Investment Objectives and Policies............................ B-2
Investment Restrictions....................................... B-19
Directors and Officers........................................ B-21
Manager and Subadvisers....................................... B-25
Distributor................................................... B-28
Portfolio Transactions and Brokerage.......................... B-30
Purchase and Redemption of Fund Shares........................ B-32
Shareholder Investment Account................................ B-36
Net Asset Value............................................... B-40
Taxes, Dividends and Distributions............................ B-41
Performance Information....................................... B-43
Custodian, Transfer and Dividend Disbursing Agent and Indepen-
dent Accountants............................................. B-46
Financial Statements.......................................... B-47
Report of Independent Accountants............................. B-64, B-75, B-87
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. Prudential Jennison 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). On June 1, 1998, the Company changed its name to The Prudential
Investment Portfolios, Inc., in connection with the replacement of Prudential
Jennison Active Balanced Fund's investment adviser and Prudential Jennison
Active Balanced Fund's name was changed to Prudential Active Balanced Fund
(Active Balanced Fund).
INVESTMENT OBJECTIVES AND POLICIES
The Company is an open-end, diversified, management investment company
consisting of three series. Each series operates as a separate fund with its
own investment objectives and policies. The investment objective of the Active
Balanced Fund is to seek income and long-term growth of capital by investing
in a portfolio of equity, fixed-income and money market securities which is
actively managed to capitalize on opportunities created by perceived
misvaluation. 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 of Growth Fund
and Growth & Income Fund and "How the Fund Invests--Investment Objective and
Policies" in Active Balanced Fund's Prospectus. There can be no assurance that
the Funds' investment objectives will be achieved.
The terms "investment adviser" and "Subadviser" refer, in the case of Growth
Fund and Growth & Income Fund, to Jennison Associates LLC (Jennison), and in
the case of Active Balanced Fund, to The Prudential Investment Corporation,
doing business as Prudential Investments (PI). 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
B-2
<PAGE>
by the full faith and credit of the United States, a Fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States if
the agency or instrumentality does not meet its commitments. Securities in
which a Fund may invest which are not backed by the full faith and credit of
the United States include obligations such as those issued by the Federal Home
Loan Bank, the Federal Home Loan Mortgage Corporation (FHLMC), the Federal
National Mortgage Association, the Student Loan Marketing Association,
Resolution Funding Corporation and the Tennessee Valley Authority, each of
which has the right to borrow from the U.S. Treasury to meet its obligations,
and obligations of the Farm Credit System, the obligations of which may be
satisfied only by the individual credit of the issuing agency. FHLMC
investments may include collateralized mortgage obligations.
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by a Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.
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
B-3
<PAGE>
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.
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.
B-4
<PAGE>
In reliance on Securities and Exchange Commission (Commission) 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, as amended (Investment Company Act) on acquiring interests in other
investment companies. In order to be able to rely on the Commission'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.
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
B-5
<PAGE>
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.
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 20% of the fixed-income portion of its portfolio 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
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"quasi-governmental entities" are issued by entities owned by a national,
state, or equivalent government or are obligations of a political unit that
are not backed by the national government's "full faith and credit" and
general taxing powers. Examples of quasi-government issuers include, among
others, the Province of Ontario and the City of Stockholm. "Foreign government
securities" also include debt securities of Government Entities denominated in
European Currency Units. A European Currency Unit represents specified amounts
of the currencies of certain of the member states of the European Community.
OPTIONS ON SECURITIES
Each Fund may purchase and write (i.e., sell) put and call options on
securities that are traded on U.S. or foreign securities exchanges or that are
traded in the over-the-counter markets. A call option is a short-term contract
pursuant to which the purchaser, in return for a premium paid, has the right
to buy the security underlying the option at a specified exercise price 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.
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A Fund may also purchase a "protective put," i.e., a put option acquired for
the purpose of protecting a portfolio security from a decline in market value.
In exchange for the premium paid for the put option, the Fund acquires the
right to sell the underlying security at the exercise price of the put
regardless of the extent to which the underlying security declines in value.
The loss to the Fund is limited to the premium paid for, and transaction costs
in connection with, the put plus the initial excess, if any, of the market
price of the underlying security over the exercise price. However, if the
market price of the security underlying the put rises, the profit the Fund
realizes on the sale of the security will be reduced by the premium paid for
the put option less any amount (net of transaction costs) for which the put
may be sold. Similar principles apply to the purchase of puts on stock
indices, as described below.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, each
Fund may also purchase and sell put and call options on securities indices
traded on U.S. or foreign securities exchanges or traded in the over-the-
counter markets. Options on securities indices are similar to options on
securities except that, rather than the right to take or make delivery of 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.
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Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result
in the institution by an exchange of special procedures which may interfere
with the timely execution of customers' orders. 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
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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 the case of
Growth Fund and Growth & Income Fund, in amounts not exceeding 20% of the
Fund's total assets and in the case of Active Balanced Fund, in amounts not
exceeding 30% of the Fund's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When a Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, a Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where a Fund
would be able to deliver the underlying securities in settlement, a Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the
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 FOREIGN CURRENCY FORWARD CONTRACTS
Each Fund may enter into foreign currency forward 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
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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 segregate
cash or other liquid assets 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). The
assets segregated will be marked-to-market daily, and if the value of the
assets segregated declines, additional cash or other liquid assets will be
placed in the account so that the value of the account will, at all times,
equal the amount of the Fund's net commitments with respect to such contracts.
A Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of
the foreign currency and if 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 foreign currency forward 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
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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.
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.
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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.
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.
B-13
<PAGE>
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of
the option is required upon exercise to assume an offsetting futures position
(a short position if the option is a call and a long position if the option is
a put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin
account which represents the amount by which the market price of the futures
contract, at exercise, exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract. With
respect to stock indices, options are traded on futures contracts for various
U.S. and foreign stock indices, including the S&P 500 Stock Index and the NYSE
Composite Index.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDICES
AND FOREIGN CURRENCIES AND FUTURES CONTRACTS AND RELATED OPTIONS
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
market 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 of Growth Fund and Growth & Income Fund and
"How the Fund Invests--Hedging and Return Enhancement Strategies--Options
Transactions" in Active Balanced Fund's Prospectus.
Except as described below, a Fund will write call options on indices only if
on such date it holds a portfolio of stocks at least equal to the value of the
index times the multiplier times the number of contracts. When a Fund writes a
call option on a broadly-based stock market index, the Fund will segregate
with its Custodian, or pledge to a broker as collateral for the option, cash
or other liquid assets 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 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 or pledged 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 or
pledged falls below 100% of the current
B-14
<PAGE>
index value times the multiplier times the number of contracts, the Fund will
segregate 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
segregated by the Fund in cash or other liquid assets with its Custodian, it
will not be subject to the requirements described in this paragraph.
POSITION LIMITS. Transactions by a Fund in futures contracts and options will
be subject to limitations, if any, established by each of the exchanges,
boards of trade or other trading facilities (including NASDAQ) governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of futures contracts and options
which a Fund may write or purchase may be affected by the futures contracts
and options written or purchased by other investment advisory clients of the
investment adviser. An exchange, board of trade or other trading facility may
order the liquidations of positions found to be in excess of these limits, and
it may impose certain other sanctions.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, a Fund may temporarily invest
in money market instruments, including commercial paper of corporations,
certificates of deposit, bankers' acceptances and other obligations of
domestic and foreign banks, obligations issued or guaranteed by the U.S.
Government, its agencies or its instrumentalities and repurchase agreements
(described more fully below). Such foreign investments may be subject to
certain risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, the seizure or
nationalization of foreign deposits and foreign exchange controls or other
restrictions.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, a Fund may purchase or
sell securities on a when-issued or delayed delivery basis, that is, delivery
and payment can take place a month or more after the date of the transaction.
A Fund will make commitments for such when-issued transactions only with the
intention of actually acquiring the securities. The Fund's Custodian will
segregate 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. See "How the Funds Invest--Other Investments and
Policies--Short Sales" in the Prospectus of Growth Fund and Growth & Income
Fund and "Investment Restrictions" below.
B-15
<PAGE>
REPURCHASE AGREEMENTS
Each Fund's repurchase agreements will be collateralized by U.S. Government
obligations. A Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Company's Board of
Directors. The investment adviser will monitor the creditworthiness of such
parties under the general supervision of the Board of Directors of the
Company. In the event of a default or bankruptcy by a seller, a Fund will
promptly seek to liquidate the collateral. To the extent that the proceeds
from any sale of such collateral upon a default in the obligation to
repurchase are less than the repurchase price, the Fund will suffer a loss.
Active Balanced Fund participates in a joint repurchase account with other
investment companies managed by Prudential Investments Fund Management LLC
pursuant to an order of the Commission. On a daily basis, any uninvested cash
balances of the Fund may be aggregated with those of such investment companies
and invested in one or more repurchase agreements. Each fund participates in
the income earned or accrued in the joint account based on the percentage of
its investment.
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 on 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.
B-16
<PAGE>
BORROWING
Active Balanced Fund may borrow an amount equal to no more than 30% of the
value of its total assets and Growth Fund and Growth & Income Fund may each
borrow an amount equal to no more than 20% of the value of their respective
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. Active Balanced Fund may pledge up to
30% of its total assets and Growth Fund and Growth & Income Fund may each
pledge up to 20% of their respective 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. Growth Fund and Growth & Income
Fund will not purchase portfolio securities when borrowings exceed 5% of the
value of their respective total assets.
Borrowing for investment purposes is generally known as "leveraging."
Leveraging exaggerates the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio. Money borrowed for
leveraging will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased and may exceed the income from the
securities purchased. In addition, a Fund may be required to maintain minimum
average balances in connection with such borrowing or pay a commitment fee to
maintain a line of credit which would increase the cost of borrowing over the
stated interest rate.
ILLIQUID SECURITIES
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
B-17
<PAGE>
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser
will consider, inter alia, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (i.e., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
The staff of the Commission 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. In addition, the Active Balanced Fund
may purchase shares of affiliated investment companies. 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 Assets" below.
SEGREGATED ASSETS
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 mark cash or other liquid assets as
segregated 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 neither the Growth
Fund's nor the Growth & Income Fund's portfolio turnover rate is expected to
exceed
B-18
<PAGE>
100%, and the Active Balanced Fund's portfolio turnover rate is not expected
to exceed 200%. 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.
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
B-19
<PAGE>
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.
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 30% 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 30% 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.
B-20
<PAGE>
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 investment companies, except: (i) 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, (ii) as part of a merger,
consolidation or other acquisition, or (iii) purchases of affiliated
investment company shares pursuant to and subject to such limits as the
Commission may impose by rule or order.
10. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% 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 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; formerly, 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
(59) The High Yield Income Fund, Inc.
*Robert F. Gunia (51) Vice President Vice President (since September 1997) of The
and Director Prudential Insurance Company of America
(Prudential); Executive Vice President and
Treasurer (since December 1996) of 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.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS ** POSITION WITH
(AGE) COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------------- ------------- -----------------------------------------
<S> <C> <C>
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; formerly Chief
751 Broad St. Financial Officer (November 1995-September
Newark, NJ 07102 1996) of Prudential Investments, Senior Vice
President and Chief Financial Officer of
Prudential Preferred Financial Services (April
1993-November 1995), Managing Director of
Prudential Investment Advisors (April 1991-
April 1993) and Senior Vice President of
Prudential Capital Corporation (July 1989-
April 1991); Chairman and Director of
Prudential Series Fund, Inc.; Director of The
High Yield Income Fund, Inc.
Thomas T. Mooney (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 and
The High Yield Income Fund, Inc.; President,
Director and Treasurer of First Financial
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) Director Employee of Prudential Investments; formerly
751 Broad St. President, Chief Executive Officer and
Newark, NJ 07102 Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.,
Executive Vice President, Director and Member
of the Operating Committee (1993-September
1996), Prudential Securities, Director
(October 1993-September 1996) of Prudential
Securities Group, Inc., Executive Vice
President, The Prudential Investment
Corporation (January 1994-September 1996),
Director (January 1994-September 1996),
Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc., and
Senior Executive Vice President and Director
of Kemper Financial Services, Inc. (September
1978-September 1993); President and Director
of The High Yield Income Fund, Inc.
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS **
(AGE) POSITION WITH COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------------- --------------------- -----------------------------------------
<S> <C> <C>
Robin B. Smith (58) Director Chairman and Chief Executive Officer of
Publishers Clearing House (since August 1996),
formerly President and Chief Executive Officer
(January 1988-August 1996) and President and
Chief Operating Officer (September 1981-
December 1988) of Publishers Clearing House;
Director of BellSouth Corporation, Texaco Inc.,
Springs Industries Inc. and Kmart Corporation.
Brian M. Storms (44) President and Director President, Prudential Investments (since October
1998); formerly President, Prudential Mutual
Funds, Annuities and Investment Management
Services (September 1996-October 1998),
Managing Director, Fidelity Investment
Institutional Services Company, Inc. (July
1991-September 1996), President, J.K. Schofield
(October 1989-September 1991), and Senior Vice
President, INVEST Financial Corporation
(September 1982-October 1989).
Louis A. Weil, III (57) 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 (59) Director President (since May 1983) of National Exchange
Inc. (new business development firm).
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of
Principal Financial PIFM; First Vice President (since March 1993)
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 Secretary Vice President (since December 1996) of PIFM;
(42) Vice President and Associate General Counsel
(since September 1987) of Prudential
Securities; formerly Vice President and
Associate General Counsel (June 1991-September
1996) of Prudential Mutual Fund Management,
Inc.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director (since March 1996) of Prudential
Investments; formerly First Vice President of
Prudential Mutual Fund Management, Inc.
(February 1993-September 1996).
</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 of the Directors and officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
B-23
<PAGE>
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 currently pays each of its Directors who is not an
affiliated person of PIFM, PI or Jennison annual compensation of $2,500, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Director may change as a result of the introduction of additional
funds on the Boards of which the Director will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Company. Under the terms of the agreement, the Company
accrues daily the amount of Directors' fees in installments which accrue
interest at a rate equivalent to the prevailing rate applicable to 90-day U.S.
Treasury bills at the beginning of each calendar quarter (the T-bill rate) or,
pursuant to a Commission 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, 1998 and the aggregate
compensation paid to such Directors for service on the Fund's board and the
boards of other investment companies managed by PIFM (Fund Complex) for the
calendar year ended December 31, 1997.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1997
COMPENSATION
PAID TO BOARD
MEMBERS
AGGREGATE FROM COMPANY AND
COMPENSATION FUND
NAME AND POSITION FROM COMPANY COMPLEX(/2/)
- ----------------- ------------ ----------------
<S> <C> <C>
Beach, Edward D.--Director $2,500 $135,000(38/63)*
Gold, Delayne D.--Director $2,500 $135,000(38/63)*
Gunia, Robert F.(/1/)--Director $ 0 $ 0
Lennox, Donald D.--Former Director $ 625 $ 90,000(26/50)*
McCorkindale, Douglas H.(/2/)--Director $2,500 $ 70,000(20/35)*
Melzer, Mendel A.(/1/)--Director $ 0 $ 0
Mooney, Thomas T.(/2/)--Director $2,500 $115,000(31/64)*
Munn, Stephen P.--Director $2,500 $ 45,000(15/21)*
Redeker, Richard A.(/1/)--Director $ 0 $ 0
Smith, Robin B.(/2/)--Director $2,500 $ 90,000(27/34)*
Storms, Brian M.(/1/)--President and Director $ 0 $ 0
Weil, III, Louis A.--Director $2,500 $ 90,000(26/50)*
Whitehead, Clay T.--Director $2,500 $ 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 November 13, 1998, the Directors and officers of the Company, as a
group, owned less than 1% of the outstanding common stock of each Fund.
B-24
<PAGE>
As of November 13, 1998, Prudential Securities, C/F Mr. C. Reed Neilsen, IRA
Rollover DTD 12/29/97, 1566 Highland Drive, North Logan, UT 84341-2142, was
the beneficial owner of 12,925 Class A shares of the Active Balanced Fund
(5.1%); Leonora J. Stevenson, 10241 SW Picks Ct., Tigard, OR 97224, Profile
Concrete Corp., Jeffrey Dandrea, 6980 Rapids Road, Lockport, NY 14094-7945,
John W. Broderich, 48 Fox Hill Dr., Southampton, NJ 08088 and Prudential
Securities c/f Mr. Thomas M. Mahoney, IRA Rollover DTD 09/15/98, 210 Webster
Ave., Lyndhurst, NJ 07071 were the beneficial owners of 2,161, 1,231, 4,264
and 1,969 Class C shares of Active Balanced Fund (9.1%, 5.1%, 17.9% and 8.3%,
respectively); Bradley L. Goldberg, 502 Oriental Ave., Mamaroneck, NY 10543-
4317 was the beneficial owner of 148,107 Class A shares of the Growth & Income
Fund (5.2%); Boston Safe Deposit & Trust as Trustee for K-Mart 401k, Prt. S, 1
Cabot Rd # 28-0035, Medford, MA 02155 was the beneficial owner of 11,324,329
Class Z shares of the Growth Fund (16.1%); and Benedictine Convent of
Perpetual Adoration c/o Sister Pat Nyquist, 8300 Morganford Rd., St. Louis, MD
63123 was the beneficial owner of 15,058 Class Z shares of the Growth & Income
Fund (8.3%).
As of November 13, 1998, Prudential Securities was the record holder for
other beneficial owners of 33,630 Class A shares (approximately 13% of such
shares outstanding), 50,007 Class B shares (approximately 2.2% of such shares
outstanding), 8,093 Class C shares (approximately 34.1% of such shares
outstanding) and 8,619 Class Z shares (less than 1% of such shares
outstanding) of Active Balanced Fund; 17,525,724 Class A shares (approximately
54.4% of such shares outstanding), 32,076,931 Class B shares (approximately
63.5% of such shares outstanding), 2,382,438 Class C shares (approximately
73.7% of such shares outstanding) and 1,020,190 Class Z shares (approximately
1.4% of such shares outstanding) of Growth Fund; and 2,042,056 Class A shares
(approximately 73% of such shares outstanding), 5,661,736 Class B shares
(approximately 73.6% of such shares outstanding), 542,421 Class C shares
(approximately 83.4% of such shares outstanding) and 120,223 Class Z shares
(approximately 66.3% 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 of Growth Fund and
Growth & Income Fund and "How the Fund is Managed--Manager" in Active Balanced
Fund's Prospectus. As of October 31, 1998, PIFM managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $68.2 billion. According to the Investment Company Institute, as
of October 31, 1998, the Prudential Mutual Funds were the 18th largest family
of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to 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
B-25
<PAGE>
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 for offer and sale, the compensation due to PIFM will be reduced by
the amount of such excess. 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) with respect to Growth Fund and Growth & Income Fund, the fees payable to
Jennison pursuant to a Subadvisory Agreement between PIFM and Jennison and,
with respect to Active Balanced Fund, the costs and expenses payable to PI
pursuant to a Subadvisory Agreement between PIFM and PI (collectively, the
Subadvisory Agreements).
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 Commission, 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
B-26
<PAGE>
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 14, 1998. The Management Agreement for
the Active Balanced 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 14, 1998.
PIFM has entered into a Subadvisory Agreement with Jennison, a wholly-owned
subsidiary of Prudential, and a Subadvisory Agreement with PI, also a wholly-
owned subsidiary of Prudential. Under the Subadvisory Agreements, Jennison
will furnish investment advisory services in connection with the management of
the Growth Fund and Growth & Income Fund and PI will furnish investment
advisory services in connection with the management of the Active Balanced
Fund, respectively. In connection therewith, Jennison and PI are obligated to
keep certain books and records of each Fund for which they serve as investment
adviser. Under each Subadvisory Agreement, Jennison and PI, respectively,
subject to the supervision of PIFM, are responsible for managing the assets of
each Fund for which they serve as investment adviser in accordance with such
Fund's investment objectives, investment program and policies. Jennison and PI
determine what securities and other instruments are purchased and sold for
each such Fund and are responsible for obtaining and evaluating financial data
relevant to such Fund. PIFM continues to have responsibility for all
investment advisory services pursuant to each Management Agreement. Under its
Subadvisory Agreement with Jennison, PIFM compensates Jennison for its
services at an annual rate of .30 of 1% of Growth Fund's and Growth & Income
Fund's respective average daily net assets up to and including $300 million
and .25 of 1% of those Fund's respective average daily net assets in excess of
$300 million. Under its Subadvisory Agreement with PIFM, PI is reimbursed by
PIFM for the reasonable costs and expenses incurred by PI in furnishing those
services.
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 the
Growth Fund management fees of $5,276,337, of which $2,348,474 was paid to
Jennison, and PIFM received from the Growth & Income Fund management fees of
$513,032, of which $256,516 was paid to Jennison. For the fiscal year ended
September 30, 1998, PIFM received from Growth Fund management fees of
$9,927,436, of which $4,286,432 was paid to Jennison, and PIFM received from
Growth & Income Fund management fees of $826,308, of which $413,154 was paid
to Jennison. The Active Balanced Fund was not offered as a part of The
Prudential Investment Portfolios, Inc. during the fiscal year ended September
30, 1997. For the period January 23, 1998 through September 30, 1998, PIFM
received from the Active Balanced Fund management fees of $788,381.
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 or PI, respectively, 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
14, 1998. The Subadvisory Agreement with PI 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 May 14, 1998.
B-27
<PAGE>
DISTRIBUTOR
Prudential Investment Management Services LLC (the Distributor), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of the Class A, Class B, Class C and Class Z shares of the
Company. Prior to June 1, 1998, Prudential Securities was the Funds'
distributor.
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), the Distributor incurs the expenses of
distributing the Company's Class A, Class B and Class C shares. See "How the
Funds are Managed--Distributor" in the Prospectus of Growth Fund and Growth &
Income Fund and "How the Fund is Managed--Distributor" in Active Balanced
Fund's Prospectus. The Distributor 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 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 May 14, 1998, 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 amended and restated Class A, Class B and Class C Plan and the
Distribution Agreement.
Class A Plan. For the fiscal year ended September 30, 1998, the Growth Fund
paid total distribution fees of $627,794 to Prudential Securities and PIMS
under the Class A Plan. For the fiscal year ended September 30, 1998, the
Growth & Income Fund paid total distribution fees of $87,862 to Prudential
Securities and PIMS under the Class A Plan. These amounts were primarily
expended for the 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 period, Prudential Securities and PIMS collectively received
approximately $1,447,800 and $159,300, respectively, in initial sales charges
with respect to the sale of Class A shares of Growth Fund and Growth & Income
Fund, respectively.
For the fiscal year ended September 30, 1998, the Active Balanced Fund paid
total distribution fees of $5,224 to Prudential Securities and PIMS under the
Class A Plan. These amounts were primarily expended for the payment of account
servicing fees to financial advisers and other persons who sell Class A
shares. In addition, for the same period, Prudential Securities and PIMS
collectively received approximately $2,900 in initial sales charges with
respect to the sale of Class A shares of the Active Balanced Fund.
Class B Plan. For the fiscal year ended September 30, 1998, Prudential
Securities and PIMS collectively received $5,578,224, $934,652 and $12,848, on
behalf of the Growth Fund, Growth & Income Fund and Active Balanced Fund,
respectively, under the Class B Plan. For the fiscal year ended September 30,
1998, Prudential Securities and PIMS spent approximately the following amounts
on behalf of each such Fund.
B-28
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
COMPENSATION TO TOTAL
PRUSEC FOR AMOUNT
COMMISSION COMMISSION SPENT BY
PAYMENTS TO PAYMENTS TO DISTRIBUTOR
FINANCIAL REPRESENTATIVES AND ON BEHALF OF
FUND PRINTING ADVISERS OVERHEAD COSTS OTHER EXPENSES FUND
- --------- -------- ----------- -------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Growth $16,300 $2,268,500 $2,985,400 $3,428,600 $8,698,800
Growth &
Income $15,300 $ 323,500 $ 372,800 $ 338,600 $1,050,200
Active
Balanced $ 800 $ 3,400 $ 7,500 $ 580,000 $ 591,700
</TABLE>
"Overhead" costs represents (a) the expenses of operating Prudential
Securities' branch offices in connection with the sale of Fund shares,
including lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communications costs and costs of
stationery and supplies, (b) the cost of client sales seminars, (c) expenses
of mutual fund sales coordinators to promote the sale of Fund shares and (d)
other incidental expenses relating to branch promotion of Fund shares.
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class B shares. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in each Prospectus. For the
same periods, Prudential Securities and PIMS received approximately $793,500,
$260,800 and $1,300 in contingent deferred sales charges attributable to Class
B shares of Growth Fund, Growth & Income Fund and Active Balanced Fund,
respectively.
Class C Plan. For the fiscal year ended September 30, 1998, Prudential
Securities and PIMS collectively received $353,371, $77,340 and $1,179 on
behalf of the Growth Fund, Growth & Income Fund and Active Balanced Fund,
respectively, under the Class C Plan. For the fiscal year ended September 30,
1998, Prudential Securities and PIMS spent approximately the following amounts
on behalf of each such Fund.
<TABLE>
<CAPTION>
APPROXIMATE
COMPENSATION TO TOTAL
PRUSEC FOR AMOUNT
COMMISSION COMMISSION SPENT BY
PAYMENTS TO PAYMENTS TO DISTRIBUTOR
FINANCIAL REPRESENTATIVES AND ON BEHALF OF
FUND PRINTING ADVISERS OVERHEAD COSTS OTHER EXPENSES FUND
- --------- -------- ----------- -------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Growth $1,200 $290,300 $278,700 $334,700 $904,900
Growth &
Income $1,300 $ 58,100 $ 9,300 $ 3,200 $ 71,900
Active
Balanced $ 100 $ 500 $ 400 $ 1,000 $ 2,000
</TABLE>
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by holders of Class C
shares upon certain redemptions of Class C shares. See "Shareholder Guide--How
to Sell Your Shares--Contingent Deferred Sales Charges" in each Prospectus.
For the fiscal year ended September 30, 1998, Prudential Securities and PIMS
collectively received approximately $14,200, $2,000 and $200 in contingent
deferred sales charges attributable to Class C shares of Growth Fund, Growth &
Income Fund and Active Balanced 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, at a meeting called for the purpose of voting on such continuance.
A Plan may 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 of the Fund on not
more than 60 days', nor less than 30 days', written notice to any other party
to the Plan. The Plan 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.
B-29
<PAGE>
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
the Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws. The Distribution Agreement was
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 14, 1998.
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 a Fund may not exceed .75 of 1%. The 6.25% limitation
applies to a Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of any class, all sales
charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Company, the selection of
brokers, dealers and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. The term "Manager" as
used in this section includes the Subadviser. Broker-dealers may receive
negotiated brokerage commissions on Fund portfolio transactions, including
options and the purchase and sale of underlying securities upon the exercise
of options. On foreign securities exchanges, commissions may be fixed. Orders
may be directed to any broker or futures commission merchant including, to the
extent and in the manner permitted by applicable law, Prudential Securities
and its affiliates.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting
as principal for their own accounts without a stated commission, although the
price of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount
of compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in
which case no commissions or discounts are paid. A Fund will not deal with
Prudential Securities or any affiliate in any transaction in which the
Distributor (or any affiliate) acts as principal, except in accordance with
rules of the Commission. Thus, it will not deal in the over-the-counter market
with Prudential Securities or any affiliate acting as market maker, and it
will not execute a negotiated trade with Prudential Securities or any
affiliate 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 the Distributor, 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 Commission. 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
B-30
<PAGE>
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 subject to such
fiduciary standards as may be imposed by applicable law. The table below sets
forth information concerning payment of commissions by the Funds, including
the amount of such commissions paid to Prudential Securities, for the three
years ended September 30, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------------ ----------------------------- -------------------------
GROWTH
ACTIVE GROWTH & ACTIVE GROWTH & ACTIVE &
BALANCED GROWTH INCOME BALANCED GROWTH INCOME BALANCED GROWTH INCOME
-------- ---------- -------- -------- ---------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage commis-
sions paid by the
Funds.................. $225,669 $1,776,771 $396,571 -- $1,135,470 $298,280 -- $436,218 --
Total brokerage
commissions paid to
Prudential Securities.. $ 0 $ 16,922 $ 205 -- $ 50,605 $ 13,935 -- $ 0 --
Percentage of total bro-
kerage commissions
paid to Prudential Se-
curities............... 0% 0.96% .05% -- 4.4% 4.67% -- 0% --
</TABLE>
Of the total brokerage commissions paid during the fiscal year ended
September 30, 1998, $52,224, $814,247 and $150,014 (or 39.40%, 46.09% and
37.83%) was paid to firms which provide research, statistical or other
services to PIFM or affiliates on behalf of Prudential Active Balanced Fund,
Prudential Jennison Growth Fund and Prudential Jennison Growth & Income Fund,
respectively. PIFM has not separately identified a portion of such brokerage
commissions as applicable to the provision of such research, statistical or
other services.
B-31
<PAGE>
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each Fund may be purchased at a price equal to the next determined
net asset value (NAV) 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 NAV without
any sales charges. See "Shareholder Guide--How to Buy Shares of the Funds" in
the Prospectus of Growth Fund and Growth & Income Fund and "Shareholder
Guide--How to Buy Shares of the Fund" in Active Balanced Fund's Prospectus.
Each class represents an interest in the same assets of a Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charges or distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv)
only Class B shares have a conversion feature and (v) Class Z shares are
offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
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, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market, and (d) are approved by the investment adviser.
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 C* shares are sold with a maximum sales charge of 1% and Class B* and
Class Z shares are sold at NAV. Using the NAV at September 30, 1998, 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........................................... $13.29 $14.44 $10.98
Maximum sales charge (5% of offering price)...... .70 .76 .58
------ ------ ------
Maximum offering price........................... $13.99 $15.20 $11.56
====== ====== ======
CLASS B
Net asset value, redemption price and offering
price per Class B share*........................ $13.22 $14.11 $10.96
====== ====== ======
CLASS C
Net asset value, redemption price and offering
price per Class C share*........................ $13.22 $14.11 $10.96
Maximum sales charge (1% of offering price)...... .13 .14 .11
------ ------ ------
$13.35 $14.25 $11.07
====== ====== ======
CLASS Z
Net asset value, offering price and redemption
price per Class Z share......................... $13.32 $14.53 $11.00
====== ====== ======
</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 Funds' Prospectuses. At
September 30, 1998, no initial sales charge was imposed on purchases of
Class C shares.
B-32
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of 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 Funds' Prospectuses.
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).
The Transfer Agent, the Distributor or your Dealer 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 your Dealer will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
price (NAV plus maximum sales charge) as of the previous business day. See
"How Each Fund Values its Shares" in the Prospectus of Growth Fund and Growth
& Income Fund and "How the Fund Values its Shares" in Active Balanced Fund's
Prospectus.
The Distributor or the Transfer Agent 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 NAV 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).
B-33
<PAGE>
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 your Dealer will not be aggregated to determine the reduced sales
charge.
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.
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.
B-34
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge (CDSC) 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 Funds'
Prospectuses. 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.
B-35
<PAGE>
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 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 NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Such shareholders will receive
credit for any CDSC paid in connection with the amount of proceeds being
invested.
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 the relative NAV next
determined after receipt of an order in proper form. An exchange will be
treated as a redemption and purchase for tax purposes. 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.
B-36
<PAGE>
CLASS B AND CLASS C. Shareholders of a Fund may exchange their Class B and
Class C shares of such Fund 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
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 Transfer Agent, the
Distributor or your Dealer. The exchange privilege may be modified, terminated
or suspended on 60 days' notice, and any fund, including a Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a fixed
amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average
cost per share is lower than it would be if a constant number of shares were
bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(/1/)
B-37
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(/2/)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS $100,000 $150,000 $200,000 $250,000
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years........ $ 110 $ 165 $ 220 $ 275
20 Years........ 176 264 352 440
15 Years........ 296 444 592 740
10 Years........ 555 833 1,110 1,388
5 Years......... 1,371 2,057 2,742 3,428
</TABLE>
- -------
(/1/) Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey
of Colleges, 1993. Average costs for private institutions include
tuition, fees, room and board for the 1993-1994 academic year.
(/2/) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of a
Fund. The investment return and principal value of an investment will
fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost.
See "Automatic Investment Plan."
AUTOMATIC INVESTMENT PLAN (AIP). Under AIP, 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 brokerage account (including a Prudential
Securities 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 AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your Dealer.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through the Transfer Agent, the Distributor or your Dealer. 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 Funds' Prospectuses.
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 NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and Distributions."
The Distributor 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.
B-38
<PAGE>
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 the Distributor or the Transfer
Agent.
Investors who are considering the adoption of such a plan should consult with
their own legal counsel or tax adviser with respect to the establishment and
maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income
tax bracket and shows how much more retirement income can accumulate within an
IRA as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(/1/)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years.......................... $ 26,165 $ 31,291
15 years.......................... 44,676 58,649
20 years.......................... 68,109 98,846
25 years.......................... 97,780 157,909
30 years.......................... 135,346 244,692
</TABLE>
- -------
(/1/) The chart is for illustrative purposes only and does not represent the
performance of a Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in 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. If investors elect to purchase the individual mutual funds that
constitute the program in an investment ratio different from that offered by
the program, the standard minimum investment requirements for the individual
mutual funds will apply.
B-39
<PAGE>
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Company. In
accordance with procedures adopted by the Company's Board of Directors, the
value of investments listed on a securities exchange and NASDAQ National
Market System securities (other than options on stock and stock indices) are
valued at the last sales price on such exchange system 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, or at the bid price on such day in the absence
of an asked price. 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 by the Manager in consultation with the investment adviser to be
over-the-counter, are valued on the basis of valuations provided by an
independent pricing agent or principal market maker 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 by the Manager in
consultation with the Subadviser 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 or board of trade or, if there
was no sale on the applicable commodities exchange or board of trade on such
day, at the mean between the most recently quoted bid and asked prices on such
exchange or board of trade. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on
which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established by and under the general supervision of the Board
of Directors.
Securities or other assets for which 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 the investment adviser (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 or the Subadviser, including its portfolio managers, traders and
its research and credit analysts, on the basis of the following factors: cost
of the security, transactions in comparable securities, relationships among
various securities and such other factors as may be determined by the Manager,
the investment adviser, Board of Directors or Valuation Committee to
materially affect the value of the security. 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 more than 60 days, 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 NAV 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 NAV. In
the event the New York Stock Exchange closes early on any business day, the
NAV 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.
NAV is calculated separately for each class. The NAV of Class B and Class C
shares will generally be lower than the NAV 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 NAV of Class A shares will generally be lower than
that of Class Z shares because Class Z shares are not subject to
B-40
<PAGE>
any distribution or service fee. It is expected, however, that the NAV 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 capital gains which are distributed to shareholders, and
permits net 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. Net capital gains of a Fund which are available
for distribution to shareholders will be computed by taking into account any
capital loss carryforward of the Fund.
Qualification of a Fund 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 and net short-term
capital gains (i.e., the excess of net short-term capital gains over net long-
term capital losses) in each year.
Gains or losses on sales of securities by a Fund will be treated as long-term
capital gains or losses if the securities have been held by it for more than
one year except in certain cases where the Fund acquires a put or writes a
call thereon or otherwise holds an offsetting position with respect to the
securities. 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 be treated as gains and losses from
the sale of securities. 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, anti-conversion and
straddle provisions of the Internal Revenue Code. In addition, debt securities
acquired by a Fund may be subject to original issue discount and market
discount rules.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which a
Fund may invest. See "Investment Objectives and Policies." These investments
will generally constitute Section 1256 contracts and will be required to be
"marked to market" for federal income tax purposes at the end of a Fund's
taxable year; that is, treated as having been sold at market value. Except
with respect to certain 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
B-41
<PAGE>
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, as ordinary income 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, if it meets certain
requirements, 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.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of a Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather
than increasing or decreasing the amount of the Fund's net capital gain. If
Section 988 losses exceed other investment company taxable income during a
taxable year, a Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Fund
shares.
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 or distributions 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 or distributions.
Furthermore, such dividends or distributions, 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 or capital gains distributions, which are expected to be or have
been announced.
Any loss realized on a sale, redemption or exchange of shares of a Fund by a
shareholder will be disallowed to the extent the shares are replaced within
the 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
B-42
<PAGE>
A shareholder who acquires shares of a Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of such
Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership (foreign shareholder) are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends unless the dividends are effectively connected with a U.S. trade or
business conducted by the foreign shareholder. Capital gain dividends paid to
a foreign shareholder are generally not subject to withholding tax. A foreign
shareholder will, however, be required to pay U.S. income tax on any dividends
and capital gain distributions which are effectively connected with a U.S.
trade or business of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent a Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign corporations, interest income, capital and currency
gain, gain or loss from Section 1256 contracts (described above), and income
from certain other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which a Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary. The Funds do 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, 1998 and for the one
year period ended September 30, 1998 for the Class A, Class B and Class C
shares of
B-43
<PAGE>
Growth Fund were 15.11% and (2.13)%, 15.51% and (2.79)%, and 16.29% and 1.21%,
respectively. The average annual total returns for Class Z shares of Growth
Fund from April 15, 1996 (commencement of investment operations) to September
30, 1998 and for the one year period ended September 30, 1998 were 19.36% and
3.22%, 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, 1998, your
average annual total returns (after fees and expenses) for the one and five
year and since inception (November 5, 1992) periods ended September 30, 1998
would have been 3.22%, 17.08% and 18.09%, respectively. In addition, the
aggregate total returns for such periods would have been 3.22%, 120.01% and
166.70%, respectively.
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 were
virtually identical and each fund had the same investment adviser through
September 30, 1998. Accordingly, if you purchased Class A shares of Prudential
Active Balanced Fund at their inception on November 7, 1996, your average
annual total returns for the one year and since inception periods ended
September 30, 1998 would have been (3.17)% and 7.04%, respectively. If you had
purchased Class B shares of Prudential Active Balanced Fund at their inception
on November 7, 1996, your average annual total returns for the one year and
since inception periods ended September 30, 1998 would have been (3.90)% and
7.26%, respectively. If you had purchased Class C shares of Prudential Active
Balanced Fund at their inception on November 7, 1996, your average annual
total returns for the one year and since inception periods ended September 30,
1998 would have been .10% and 9.23%, respectively. 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, five year and since
inception periods ended September 30, 1998 would have been 2.12%, 9.96% and
10.54%, respectively.
The average annual total returns for the period from November 7, 1996
(commencement of investment operations) to September 30, 1998 and for the one
year period ended September 30, 1998 for the Class A, Class B, Class C and
Class Z shares of Growth & Income Fund were 5.99%, 6.13%, 8.12% and 9.21%, and
(13.93)%, (15.01)%, (11.01)% and (9.31)%, 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).
B-44
<PAGE>
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 to September 30, 1998 and for the one year period ended
September 30, 1998 for the Class A, Class B and Class C shares of Growth Fund
were 58.55% and 3.02%, 55.16% and 2.21% and 55.16% and 2.21%, respectively.
The aggregate total returns for Class Z shares of Growth Fund from April 15,
1996 to September 30, 1998 and for the one year period ended September 30,
1998 were 54.53% and 3.22%, 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 to September 30, 1998 and the one year period
ended September 30, 1998 were 17.52%, 15.93%, 15.93% and 18.17%, and (9.40)%,
(10.01)%, (10.01)% and (9.31)%, respectively. The aggregate total returns for
the period from November 7, 1996 (commencement of investment operations) to
September 30, 1998 and the one year period ended September 30, 1998 for the
Class A, Class B and Class C shares of Active Balanced Fund were 19.75% and
1.93%, 18.20% and 1.10% and 18.20% and 1.10%, respectively. Aggregate total
returns for the Class Z shares of Active Balanced Fund, had you purchased them
at their inception (January 4, 1993) from Prudential Active Balanced Fund, for
the one year, five year and since inception periods ended September 30, 1998
would have been 2.12%, 60.78% and 77.67%, respectively.
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)
A Look at Performance Over the Long-Term
Average Annual Returns
1/1/26 - 12/31/97
[THE FOLLOWING DATA WAS REPRESENTED BY A BAR GRAPH]
Common Stock 11.0%
Long-Term Gov't. Bonds 5.2%
Inflation 3.1%
- -----------
(1) Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1998
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-45
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of each
Fund and cash and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Company. Subcustodians
provide custodial services for a Fund's foreign assets held outside the United
States. See "How the Funds are Managed--Custodian and Transfer and Dividend
Disbursing Agent" in the Prospectus of Growth Fund and Growth & Income Fund
and "How the Fund is Managed--Custodian and Transfer and Dividend Disbursing
Agent" in the Active Balanced Fund's 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, 1998,
Growth Fund incurred fees of approximately $2,279,000 for the services of
PMFS. For the fiscal year ended September 30, 1998, Growth & Income Fund
incurred fees of approximately $160,900 for the services of PMFS. For the
fiscal year ended September 30, 1998, the Active Balanced Fund incurred fees
of approximately $258,400 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.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Company's independent accountants, and in that capacity
audits the Funds' annual financial statements.
B-46
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1998
- ------------------------------------------------------------------
Shares Description Value (Note 1)
- ------------------------------------------------------------------
LONG-TERM INVESTMENTS--81.7%
COMMON STOCKS--46.4%
- ------------------------------------------------------------------
Aerospace/Defense--0.7%
7,300 Allied Signal, Inc. $ 258,237
5,600 Lockheed Martin Corp. 564,550
100 Northrop Grumman Corp. 7,300
3,000 Raytheon Co. 161,813
3,200 United Technologies Corp. 244,600
-------------
1,236,500
- ------------------------------------------------------------------
Airlines--0.4%
1,100 Alaska Air Group Inc 37,469
4,500 AMR Corp. 249,469
4,200 Delta Airlines, Inc. 408,450
900 Southwest Airlines Co. 18,000
-------------
713,388
- ------------------------------------------------------------------
Aluminum--0.2%
5,900 Aluminum Co. of America 418,900
- ------------------------------------------------------------------
Apparel
3,000 Jones Apparel Group, Inc.(a) 68,813
- ------------------------------------------------------------------
Automobiles & Trucks--1.1%
7,700 Chrysler Corp. 368,637
12,900 Ford Motor Co. 605,494
11,900 General Motors Corp., Class H 650,781
4,200 PACCAR, Inc. 172,988
-------------
1,797,900
- ------------------------------------------------------------------
Advertising
1,600 Interpublic Group of Companies, Inc. 86,300
- ------------------------------------------------------------------
Banking--3.1%
9,900 Bankamerica Corp. 529,650
2,100 BankBoston Corp. 69,300
1,400 Bankers Trust NY Corp. $ 82,600
16,800 Chase Manhattan Corp. 726,600
8,500 Citicorp 789,969
3,700 First Chicago NBD Corp. 253,450
10,200 First Union Corp. 522,112
6,900 Fleet Financial Group, Inc. 506,719
13,900 Hibernia Corp. 200,681
3,100 Keycorp 89,513
400 Mercantile Bancorporation, Inc. 19,350
4,400 National City Corp. 290,125
9,300 Norwest Corp. 333,056
3,100 Suntrust Banks, Inc. 192,200
3,000 Wachovia Corp. 255,750
1,100 Wells Fargo & Co. 390,500
-------------
5,251,575
- ------------------------------------------------------------------
Beverages--0.6%
13,200 Coca-Cola Co. 760,650
200 Coca-Cola Enterprises Inc. 5,050
9,300 PepsiCo, Inc. 273,769
-------------
1,039,469
- ------------------------------------------------------------------
Building & Construction
1,600 Masco Corp. 39,400
- ------------------------------------------------------------------
Business Services--0.6%
9,600 Omnicom Group, Inc. 432,000
22,100 Ryder System, Inc. 549,737
-------------
981,737
- ------------------------------------------------------------------
Cellular Communications
600 AirTouch Communications, Inc.(a) 34,200
- ------------------------------------------------------------------
*See Note 7. B-47
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1998
- ------------------------------------------------------------------
Shares Description Value (Note 1)
- ------------------------------------------------------------------
Chemicals--0.5%
3,000 Dow Chemical Co. $ 256,312
100 E.I. Du Pont De Nemours & Co. 5,613
4,000 M.A. Hanna Co. 45,000
25,400 Schulman (A.), Inc. 358,775
12,200 Wellman Inc. 155,550
-------------
821,250
- ------------------------------------------------------------------
Chemical-Specialty--0.1%
4,200 Rohm & Haas Co. 116,813
- ------------------------------------------------------------------
Commercial Services--0.4%
4,900 Paychex, Inc. 252,656
8,000 Quintiles Transnational, Corp.(a) 350,000
-------------
602,656
- ------------------------------------------------------------------
Computer Software & Services--2.9%
1,900 America Online, Inc.(a) 211,375
3,300 BMC Software Inc.(a) 198,206
1,500 Compuware Corp.(a) 88,313
3,700 Comverse Technology, Inc.(a) 151,238
8,200 EMC Corp. 468,937
12,800 Informix Corp.(a) 64,000
7,300 Keane, Inc(a) 256,413
27,300 Microsoft Corp.(a) 3,004,706
14,100 Oracle Systems Corp.(a) 410,662
-------------
4,853,850
- ------------------------------------------------------------------
Computer Systems/Peripherals--2.6%
16,400 Dell Computer Corp.(a) 1,078,300
10,300 Hewlett-Packard Co. 545,256
16,200 Intel Corp. 1,389,150
8,800 International Business Machines Corp. 1,126,400
1,500 Symbol Technologies, Inc. 76,969
3,900 Synopsys, Inc.(a) 129,919
-------------
4,345,994
- ------------------------------------------------------------------
Containers--0.1%
7,900 Owens-Illinois Holdings Corp.(a) 197,500
Diversfied Consumer Products--0.5%
11,800 Procter & Gamble Co. $ 837,062
- ------------------------------------------------------------------
Diversified Operations--1.3%
25,900 General Electric Co. 2,060,668
4,100 Seagram Co., Ltd. 117,619
-------------
2,178,287
- ------------------------------------------------------------------
Diversified Manufacturing--0.3%
13,600 Tenneco, Inc. 447,100
- ------------------------------------------------------------------
Electrical Utilities--2.3%
13,100 Allegheny Energy Inc. 413,469
200 American Electric Power Co., Inc.(a) 9,763
10,600 American Power Conversion Co.(a) 399,487
1,700 Carolina Power & Light Co. 78,519
3,900 Consolidated Edison, Inc. 203,287
2,800 Dominion Resources, Inc. 124,950
9,300 Florida Progress Corp. 402,806
10,900 General Public Utilities Corp. 463,250
8,200 Hawaiian Electric Industries Inc. 338,250
4,000 New England Electric System 166,000
17,396 PP & L Resources, Inc. 450,121
15,900 Public Service Company of New
Mexico(a) 352,781
3,100 Public Service Enterprise Group Inc. 121,869
11,700 Southern Co. 344,419
300 Texas Utilities Co. 13,969
-------------
3,882,940
- ------------------------------------------------------------------
Electronic Components--0.2%
10,800 Avnet, Inc. 397,575
- ------------------------------------------------------------------
Financial Services--3.2%
5,400 Ahmanson (H.F.) & Co. 299,700
5,200 American Express Co. 403,650
300 Associates First Capital Corp. 19,575
- ------------------------------------------------------------------
*See Note 7. B-48
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1998
- ------------------------------------------------------------------
Shares Description Value (Note 1)
- ------------------------------------------------------------------
Financial Services (cont'd.)
7,300 BankAmerica Corp. $ 438,912
1,700 Capital One Financial 175,950
4,900 Charles Schwab Corp. 192,938
11,700 Citigroup Inc. 438,750
5,200 Countrywide Mortgage Investments, Inc. 216,450
8,400 Federal Home Loan Mortgage Corp. 415,275
16,200 Federal National Mortgage Assoc. 1,040,850
700 Golden West Financial Corp. 57,269
7,900 Lehman Brothers Holdings, Inc. 223,175
6,300 Merrill Lynch & Co., Inc. 298,462
4,800 MGIC Investment Corp. 177,000
2,400 Morgan (J.P.) & Co., Inc. 203,100
6,700 Morgan Stanley, Dean Witter & Co. 288,519
2,000 PaineWebber Group, Inc. 60,000
6,100 Providian Financial Corp. 517,356
-------------
5,466,931
- ------------------------------------------------------------------
Foods--0.6%
10,395 Archer-Daniels Midland Co. 174,116
7,900 Dole Food Co., Inc. 285,388
7,200 General Mills, Inc. 504,000
-------------
963,504
- ------------------------------------------------------------------
Gas Distribution--0.2%
10,600 Peoples Energy Corp. 381,600
- ------------------------------------------------------------------
Health Care Services--0.2%
8,300 Allegiance Corp. 246,925
3,100 American Home Products Corp. 162,363
-------------
409,288
- ------------------------------------------------------------------
Home Furnishings--0.3%
5,700 Newell Co. 262,556
7,000 Springs Industries, Inc. 243,250
-------------
505,806
Human Resources--0.2%
8,500 Robert Half International Inc. $ 367,094
- ------------------------------------------------------------------
Insurance--2.2%
16,800 Allstate Corp. 700,350
9,100 American International Group, Inc. 700,700
2,900 Aon Corp. 187,050
5,600 CIGNA Corp. 370,300
1,200 General Reinsurance Corp. 243,600
5,900 Hartford Financial Services Group 279,881
1,200 Marsh & McLennan Cos., Inc. 59,700
13,600 Old Republic International Corp. 306,000
1,300 Progressive Corp. 146,575
11,900 Torchmark Corp. 427,656
2,100 Transamerica Corp. 222,600
-------------
3,644,412
- ------------------------------------------------------------------
Machinery & Equipment--0.5%
9,700 Case Corp. 210,975
2,900 Caterpillar, Inc. 129,231
2,200 Cooper Industries, Inc. 89,650
9,000 Danaher Corp. 270,000
5,900 Stewart & Stevenson Services, Inc. 69,325
-------------
769,181
- ------------------------------------------------------------------
Media & Communications--0.4%
400 Gannett Co., Inc. 21,425
1,300 Viacom, Inc.(a) 75,400
21,600 Walt Disney Co. 546,750
-------------
643,575
- ------------------------------------------------------------------
Medical Devices
700 Lincare Holdings Inc.(a) 27,125
- ------------------------------------------------------------------
Medical Products--2.9%
5,300 Cardinal Health, Inc. 547,225
10,100 Johnson & Johnson Co. 790,325
100 McKesson Corporation 9,162
- ------------------------------------------------------------------
*See Note 7. B-49
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1998
- ------------------------------------------------------------------
Shares Description Value (Note 1)
- ------------------------------------------------------------------
Medical Products (cont'd.)
14,200 Mylan Laboratories $ 418,900
5,200 Pacificare Health Systems(a) 387,400
9,900 Schering Plough Corp. 1,025,269
7,900 Total Renal Care Holdings, Inc.(a) 189,600
13,000 Tyco International Ltd. 718,250
10,300 Warner-Lambert Co. 777,650
-------------
4,863,781
- ------------------------------------------------------------------
Medical Technology--0.6%
2,300 Abbott Laboratories 99,906
4,600 Amgen, Inc.(a) 347,588
4,500 Biogen, Inc.(a) 296,156
9,600 HBO & Co. 277,200
-------------
1,020,850
- ------------------------------------------------------------------
Metals--0.4%
100 Alcan Aluminum Ltd. 2,344
12,500 Reynolds Metals Co. 635,156
-------------
637,500
- ------------------------------------------------------------------
Miscellaneous/Diversified--0.3%
5,500 Cintas Corp 275,687
6,500 Harley-Davidson Inc. 190,938
-------------
466,625
- ------------------------------------------------------------------
Miscellaneous Industrial--0.2%
4,400 Clorox Co. 363,000
- ------------------------------------------------------------------
Networking--0.4%
10,700 Cisco Systems, Inc.(a) 661,394
- ------------------------------------------------------------------
Oil & Gas Equipment & Services--0.4%
3,100 Dresser Industries, Inc. 94,938
4,000 Enron Corp., 211,250
15,200 Tidewater, Inc. 315,400
-------------
621,588
Oil & Gas Exploration/Production--1.1%
1,200 MCN Corp. $ 20,475
11,100 Phillips Petroleum Co. 500,887
18,900 Royal Dutch Petroleum Co. 900,112
6,600 Texaco, Inc. 413,738
500 USX-Marathon Group 17,719
-------------
1,852,931
- ------------------------------------------------------------------
Oil & Gas Services--1.5%
4,400 Amerada Hess Corp. 253,825
3,000 Ashland, Inc. 138,750
1,100 Chevron Corp. 92,469
7,650 Columbia Gas System, Inc. 448,481
2,700 Consolidated Natural Gas Co. 147,150
14,600 Exxon Corp. 1,024,738
6,300 Mobil Corp. 478,406
-------------
2,583,819
- ------------------------------------------------------------------
Paper & Forest Products--0.2%
13,900 Westvaco Corp. 333,600
- ------------------------------------------------------------------
Pharmaceuticals--2.8%
8,700 Bristol Myers Squibb Co. 903,712
7,100 Eli Lilly & Co. 556,019
10,200 Merck & Co., Inc. 1,321,537
16,500 Pfizer, Inc. 1,747,969
3,800 Watson Pharmaceuticals, Inc.(a) 192,850
-------------
4,722,087
- ------------------------------------------------------------------
Photography--0.1%
3,000 Eastman Kodak Co. 231,938
- ------------------------------------------------------------------
Plastic Products--0.2%
19,500 Milacron Inc. 301,031
- ------------------------------------------------------------------
Printing--0.1%
1,800 Lexmark International Group, Inc.(a) 124,763
- ------------------------------------------------------------------
*See Note 7. B-50
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1998
- ------------------------------------------------------------------
Shares Description Value (Note 1)
- ------------------------------------------------------------------
Publishing--0.3%
8,300 American General Corp. $ 530,163
900 New York Times Co. 24,750
400 Tribune Co. 20,125
-------------
575,038
- ------------------------------------------------------------------
Retail--2.9%
4,200 Abercrombie & Fitch Co.(a) 184,800
1,400 Bed Bath & Beyond, Inc.(a) 32,725
5,100 Best Buy Co., Inc. 211,650
1,400 Costco Companies, Inc. 66,325
2,500 Dayton-Hudson Corp. 89,375
6,700 Gap, Inc. 353,425
23,500 Home Depot, Inc. 928,250
4,700 Kohl's Corp.(a) 183,300
9,200 Lowe's Companies, Inc. 292,675
4,500 McDonald's Corp. 268,594
2,900 Micro Warehouse Inc.(a) 43,681
18,700 Nine West Group, Inc.(a) 178,819
3,400 Penney (J.C.) Co., Inc. 152,788
16,600 Reebok International, Ltd. 225,137
5,600 Sears, Roebuck & Co. 247,450
100 Tiffany & Co. 3,138
23,900 Wal-Mart Stores, Inc. 1,305,537
1,300 Walgreen Co. 57,281
-------------
4,824,950
- ------------------------------------------------------------------
Steel & Metals--0.4%
18,000 AK Steel Holding Corp. 295,875
13,300 Bethlehem Steel Corp.(a) 109,725
7,600 Nucor Corp. 308,750
800 USX-U.S. Steel Group, Inc. 19,100
-------------
733,450
- ------------------------------------------------------------------
Telecommunication Services--3.4%
13,500 Ameritech Corp. 639,563
19,900 AT&T Corp. 1,162,906
20,500 Bell Atlantic Corp. 992,969
14,900 BellSouth Corp. 1,121,225
500 Century Telephone Enterprises, Inc. $ 23,625
6,800 GTE Corp. 374,000
10,576 MCI WorldCom, Inc.(a) 516,882
4,700 SBC Communications, Inc. 208,856
9,100 Sprint Corp. 655,200
-------------
5,695,226
- ------------------------------------------------------------------
Telecommunications Equipment--1.0%
6,800 ADC Telecommunications, Inc.(a) 143,650
18,000 Lucent Technologies, Inc. 1,243,125
4,100 Qualcomm, Inc.(a) 196,543
700 Tellabs, Inc.(a) 27,869
-------------
1,611,187
- ------------------------------------------------------------------
Textile-Apparel Manufacturing--0.2%
28,900 Burlington Industries Inc.(a) 274,550
- ------------------------------------------------------------------
Tires & Rubber--0.2%
8,800 B.F. Goodrich Co. 287,650
- ------------------------------------------------------------------
Tobacco--0.6%
11,000 Philip Morris Co., Inc. 506,687
1,500 Universal Corp. 53,625
14,600 UST, Inc. 431,613
-------------
991,925
- ------------------------------------------------------------------
Transportation--0.1%
6,800 Airborne Freight Corp. 117,725
- ------------------------------------------------------------------
Transportation/Trucking/Shipping--0.4%
14,900 Burlington Northern, Inc. 476,800
4,700 CSX Corp. 197,694
-------------
674,494
Total common stocks
(cost $83,311,997) 78,098,827
-------------
- ------------------------------------------------------------------
*See Note 7. B-51
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1998
- --------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- --------------------------------------------------------------------
DEBT OBLIGATIONS--35.3%
CORPORATE BONDS--19.7%
- --------------------------------------------------------------------
Aerospace/Defense--1.2%
Aa3 $ 700 (b) Boeing Inc., Deb.
8.10%, 11/15/06 $ 808,955
Baa3 700 (b) Northrop Grumman Corp.,
Deb.
7.75%, 3/1/16 743,498
Baa1 500 (b) Raytheon Co., Note
6.30%, 3/15/05 521,890
------------
2,074,343
- --------------------------------------------------------------------
Asset Backed Securities--1.9%
Aaa 1,500 (b) Citibank Credit Card Master
Trust, Cl. A
6.05%, 1/15/08 1,559,055
Aaa 1,500 (b) MBNA Master Credit Card
Trust Ser. C, Cl. A
6.45%, 6/15/05 1,601,250
------------
3,160,305
- --------------------------------------------------------------------
Automobiles & Trucks--0.7%
A2 1,000 (b) General Motors Corp., Note
7.70%, 4/15/16 1,122,100
- --------------------------------------------------------------------
Banking--3.1%
Aa3 700 (b) Abbey National PLC, Note
6.69%, 10/17/05 739,578
Aa2 1,000 (b) BankAmerica Corp., MTN
7.125%, 5/12/05 1,079,590
A1 1,000 (b) Chemical Bank, Sub. Note
7.00%, 6/1/05 1,062,400
A1 500 (b) Citicorp, Sub. Note
7.125%, 9/1/05 538,340
Aa2 700 (b) Deutsche Bank, Deb.
6.70%, 12/13/06 732,837
Aa2 1,000 (b) NationsBank Corp.,
Sr. Note
6.375%, 5/15/05 1,037,790
------------
5,190,535
Building & Construction--0.5%
A3 $ 800 (b) Hanson Overseas BV,
Sr. Note
6.75%, 9/15/05 $ 851,640
- --------------------------------------------------------------------
Financial Services--4.7%
Aa3 750 (b) Associates Corp. North
America, Sr. Note
6.75%, 7/15/01 779,490
A2 1,000 (b) Bear, Stearns & Co. Inc.,
Sr. Note
8.75%, 3/15/04 1,128,270
A1 830 (b) Ford Motor Co. (Del.), Bond
6.50%, 8/1/18 839,263
Ford Motor Credit Corp.,
Deb.
A1 285 (b) 7.40%, 11/1/46 306,164
(b) Note
A1 600 7.75%, 3/15/05 673,656
A2 570 (b) General Motors Acceptance
Corp., Sr. Note
6.75%, 2/7/02 595,507
A1 700 (b) Goldman, Sachs Group LP,
Note
7.25%, 10/1/05 776,104
Aa3 500 Merrill Lynch & Co., MTN
6.02%, 5/11/01 509,440
A1 1,000 (b) Morgan Stanley, Dean Witter
& Co., Note
6.875%, 3/1/07 1,042,580
A1 700 (b) Santander Finance
Issuances, Note
6.80%, 7/15/05 705,103
A3 600 (b) US West Capital Funding
Inc., Note
6.125%, 7/15/02 620,010
------------
7,975,587
- --------------------------------------------------------------------
Health Care Services--1.0%
A2 1,565 (b) American Home Products
Corp., Note
7.70%, 2/15/00 1,618,883
- --------------------------------------------------------------------
*See Note 7. B-52
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1998
- --------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- --------------------------------------------------------------------
Media & Communications--0.9%
Baa3 $ 600(b) News America Holdings,
Inc., Deb.
9.25%, 2/1/13 $ 735,012
Baa3 600(b) Time Warner, Inc., Sr. Note
9.125%, 1/15/13 753,414
------------
1,488,426
- --------------------------------------------------------------------
Medical Products--0.2%
Baa1 400(b) Tyco International Group,
Note
6.375%, 6/15/05 421,624
- --------------------------------------------------------------------
Oil & Gas Exploration/Production--0.5%
A2 700 (b) Atlantic Richfield Co.,
Deb.
10.875%, 7/15/05 907,564
- --------------------------------------------------------------------
Retail--1.9%
A2 565 (b) Penney (J.C.) Co., Inc.,
MTN
7.05%, 5/23/05 617,472
A2 1,100 (b) Sears Roebuck & Co., Deb.
9.375%, 11/1/11 1,430,209
Aa2 1,000 (b) Wal Mart Stores Inc., Note
8.625%, 4/1/01 1,086,540
------------
3,134,221
- --------------------------------------------------------------------
Telecommunication Services--0.6%
Baa1 1,000 (b) GTE Corp., Deb.
6.36%, 4/15/06 1,065,100
- --------------------------------------------------------------------
Telecommunications--0.6%
Baa2 1,000 (b) Worldcom, Inc., Sr. Note
6.40%, 8/15/05 1,055,220
- --------------------------------------------------------------------
Utilities--1.9%
A2 1,000 (b) Hydro Quebec, Deb. (Canada)
7.50%, 4/1/16 1,118,280
Southern California Edison
Co., Note
A2 1,000 5.875%, 1/15/01 1,017,530
A2 1,000 6.50%, 6/1/01 1,035,940
------------
3,171,750
Total corporate bonds
(cost $32,412,785) 33,237,298
------------
U.S. GOVERNMENT SECURITIES--15.6%
- --------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH
OBLIGATIONS--12.5%
Federal National Mortgage
Assoc.,
$ 9,500 (c) 6.50%, 12/1/28 $ 9,672,445
4,000 (c) 7.00%, 12/1/28 4,111,240
4,000 (c) 7.50%, 12/1/28 4,126,240
Government National
Mortgage Assoc.,
3,000 (c) 8.00%, 12/15/28 3,123,750
------------
Total U.S. government
agency mortgage
pass-through obligations
(cost $20,954,363) 21,033,675
------------
- --------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--3.1%
United States Treasury
Bonds,
1,500 (b) 13.25%, 5/15/09 2,544,135
1,000 (b) 7.875%, 2/15/21 1,349,370
United States Treasury
Notes,
1,170 (b) 6.50%, 8/31/01 1,236,912
------------
Total U.S. government
obligations
(cost $4,963,050) 5,130,417
------------
Total U.S. government
securities
(cost $25,917,413) 26,164,092
------------
Total debt obligations
(cost $58,330,198) 59,401,390
------------
Total long-term investments
(cost $141,642,195) 137,500,217
------------
- --------------------------------------------------------------------
SHORT-TERM INVESTMENTS--31.5%
- --------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--1.0%
United States Treasury
Bills,
100 4.45%, 12/17/98 99,048
1,250 4.66%, 12/17/98 1,237,541
200 4.76%, 12/17/98 197,964
150 4.92%, 12/17/98 148,421
------------
Total U.S. government
obligations
(cost $1,682,974) 1,682,974
------------
- --------------------------------------------------------------------
*See Note 7. B-53
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1998
- --------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- --------------------------------------------------------------------
COMMERCIAL PAPER--12.5%
Chrysler Financial Corp.,
P-1 $ 5,000 5.53%, 10/13/98 $ 4,990,783
Conagra, Inc.,
P-2 2,384 5.67%, 10/8/98 2,381,372
Cox Enterprises Inc.,
P-2 1,930 5.70%, 10/6/98 1,928,472
Dayton Hudson Corp.,
P-2 3,910 5.63%, 10/14/98 3,902,051
Textron Financial,
P-2 3,627 6.10%, 10/1/98 3,627,000
Windmill Funding Corp.,
NR 3,000 5.53%, 10/6/98 2,997,696
NR 1,188 5.50%, 10/9/98 1,186,548
------------
Total commercial paper
(cost $21,013,922) 21,013,922
------------
- --------------------------------------------------------------------
REPURCHASE AGREEMENT--18.0%
30,406 Joint Repurchase Agreement
Account
5.522%, 10/01/98
(cost $30,406,000; Note
5) 30,406,000
------------
Total short-term
investments
(cost $53,102,896) 53,102,896
------------
- --------------------------------------------------------------------
Total Investments--113.2%
(cost $194,745,091; Note 4) 190,603,113
Liabilities in excess of
other
assets--(13.2%) (22,225,246)
------------
Net Assets--100% $168,377,867
============
- ---------------
(a) Non-income producing security.
(b) All or partial amount of security is segregated as collateral for financial
futures transactions. Aggregate market value of $35,804,805 segregated at
9/30/98.
(c) Mortgage dollar roll, see Note 1.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current SAI contains a description of Moody's and Standard & Poor's
ratings.
- --------------------------------------------------------------------------------
*See Note 7. B-54
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Statement of Assets and Liabilities PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1998
<S> <C>
Investments, at value (cost $194,745,091).............................................................. $ 160,197,113
Repurchase Agreement................................................................................... 30,406,000
Cash................................................................................................... 14,294
Receivable for investments sold........................................................................ 25,006,086
Dividends and interest receivable...................................................................... 827,808
Receivable for Fund shares sold........................................................................ 227,687
Other assets........................................................................................... 9,657
---------------
Total assets....................................................................................... 216,688,645
---------------
Liabilities
Payable for investments purchased...................................................................... 47,054,176
Due to broker-variation margin......................................................................... 899,578
Payable for Fund shares reacquired..................................................................... 170,337
Accrued expenses....................................................................................... 97,350
Management fee payable................................................................................. 86,244
Distribution fee payable............................................................................... 3,093
---------------
Total liabilities.................................................................................. 48,310,778
---------------
Net Assets............................................................................................. $ 168,377,867
===============
Net assets were comprised of:
Common stock, at par................................................................................ $ 12,647
Paid-in capital in excess of par.................................................................... 144,361,513
---------------
144,374,160
Undistributed net investment income................................................................. 3,863,980
Accumulated net realized gain on investments........................................................ 23,567,471
Net unrealized depreciation on investments.......................................................... (3,427,744)
---------------
Net assets, September 30, 1998......................................................................... $ 168,377,867
===============
Class A:
Net asset value and redemption price per share
($3,218,074 / 242,164 shares of common stock issued and outstanding)............................. $13.29
Maximum sales charge (5% of offering price)......................................................... .70
------
Maximum offering price to public.................................................................... $13.99
======
Class B:
Net asset value, offering price and redemption price per share
($3,037,721 / 229,776 shares of common stock issued and outstanding)............................. $13.22
======
Class C:
Net asset value, offering price and redemption price per share
($283,793 / 21,470 shares of common stock issued and outstanding)................................ $13.22
======
Class Z:
Net asset value, offering price and redemption price per share
($161,838,279 / 12,153,882 shares of common stock issued and outstanding)........................ $13.32
======
</TABLE>
- --------------------------------------------------------------------------------
*See Note 7. B-55
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Operations
- ------------------------------------------------------------------
Year Ended
Net Investment Income September 30, 1998
Income
Interest.............................. $ 5,787,656
Dividends (net of foreign withholding
taxes of $2,472)................... 1,481,227
---------------
Total income......................... 7,268,883
---------------
Expenses
Management fee........................ 1,176,079
Distribution fee--Class A............. 5,224
Distribution fee--Class B............. 12,848
Distribution fee--Class C............. 1,179
Transfer agent's fees and expenses.... 269,000
Registration fees..................... 127,000
Reports to shareholders............... 125,000
Custodian's fees and expenses......... 105,000
Legal fees and expenses............... 24,000
Audit fee and expenses................ 20,000
Directors' fees....................... 6,200
Organization expense.................. 3,404
Miscellaneous......................... 2,203
---------------
Total expenses....................... 1,877,137
---------------
Net investment income.................... 5,391,746
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............... 28,021,950
Financial futures contracts........... (1,583,588)
---------------
26,438,362
Net change in unrealized appreciation
(depreciation) on:
Investments........................... (28,930,426)
Financial futures contracts........... 714,234
---------------
(28,216,192)
Net gain on investments.................. (1,777,830)
---------------
Net Increase in Net Assets
Resulting from Operations................ $ 3,613,916
===============
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------------
Increase (Decrease) Year Ended September 30,
----------------------------
in Net Assets 1998 1997
------------ ------------
Operations
Net investment income.......... $ 5,391,746 $ 4,516,834
Net realized gain on
investments................. 26,438,362 11,725,117
Net change in unrealized
appreciation (depreciation)
on investments.............. (28,216,192) 13,786,966
------------ ------------
Net increase in net assets
resulting from operations... 3,613,916 30,028,917
------------ ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A..................... (24,889) (64)
Class B..................... (4,933) (6)
Class C..................... (273) (6)
Class Z..................... (4,664,569) (4,627,738)
------------ ------------
(4,694,664) (4,627,814)
------------ ------------
Distributions to shareholders
from net realized gains
Class A..................... (82,174) (128)
Class B..................... (24,906) (12)
Class C..................... (1,378) (12)
Class Z..................... (13,860,433) (9,255,475)
------------ ------------
(13,968,891) (9,255,627)
------------ ------------
Fund share transactions
Net proceeds from shares
sold........................ 105,305,809 55,048,728
Net asset value of shares
issued in reinvestment of
distributions............... 18,663,277 13,883,406
Cost of shares reacquired...... (100,421,933) (78,785,554)
------------ ------------
Net increase (decrease) in net
assets from Fund share
transactions................ 23,547,153 (9,853,420)
------------ ------------
Total increase.................... 8,497,514 6,292,056
Net Assets
Beginning of year................. 159,880,353 153,588,297
------------ ------------
End of year(a).................... $168,377,867 $159,880,353
============ ============
- ---------------
(a) Includes undistributed net
investment income of.......... $ 3,863,980 $ 3,191,713
------------ ------------
- --------------------------------------------------------------------------------
*See Note 7. B-56
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Prudential Active Balanced Fund (the 'Fund') is a separately managed series
of The Prudential Investment Portfolios, Inc. (the 'Series'), formerly
Prudential Jennison Series Fund, Inc. (the 'Jennison Fund'). The Jennison 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. Prior to January 23, 1998, the Fund was known as Prudential Active
Balanced Fund (the 'Portfolio'), a separately managed series of Prudential
Dryden Fund (the 'Company') (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 Portfolio
commenced on January 4, 1993
The Fund's investment objective is to seek income and long-term growth of
capital by investing in a portfolio of equity, fixed-income and money market
securities, which is actively managed to capitalize on opportunities created by
perceived misvaluation.
- ------------------------------------------------------------
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 such
exchange or system on the day of valuation, or, if there was no sale on such
day, at the mean between the last bid and asked prices on such day or at the bid
price on such day 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 by the Manager, in consultation with the Subadviser,
to be over-the-counter, are valued by an independent pricing agent or principal
market maker. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager and the Subadviser to be over-the-counter, are
valued at the mean between the last reported bid and asked prices provided by a
principal market maker. Options on securities and indices traded on an exchange
are valued at the mean between the most recently quoted bid and asked prices on
such exchange. Futures contracts and options thereon traded on a commodities
exchange or board of trade are valued at the last sales price at the close of
trading on such exchange or board of trade or, if there was no sale on the
applicable commodities exchange or board of trade on such day, at the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade. Securities for which market quotations are not readily available,
other than private placements, are valued at a price supplied by an independent
pricing agent which is, in the opinion of such pricing agent, representative of
the market value of such securities as of the time of determination of net asset
value or, using a methodology developed by an independent pricing agent, which
is, in the judgement of the Manager and Subadviser, able to produce prices which
are representative of market value.
Short-term securities which mature in more than 60 days, for which market
quotations are readily available, are valued at current market quotations as
provided by an independent pricing agent or principal market maker. Short-term
securities which mature in 60 days or less are valued at cost with interest
accrued or discount amortized to the date of maturity, unless the Board of
Directors determines that such variation does not represent fair value.
All securities are valued as of 4:15 p.m., New York time.
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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities or
commodities at a set price for delivery on a future date. Upon entering into a
financial futures contract, the Fund is required to pledge to the broker an
amount of cash and/or other assets equal to a certain percentage of the contract
amount. This amount is known as the 'initial margin.' Subsequent payments, known
as 'variation margin,' are made or received by the Fund each day, depending on
the daily fluctuations in the value of the underlying security or commodity.
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.
The Fund invests in financial futures contracts in order to hedge their existing
portfolio securities or securities the Fund intends to purchase against
fluctuations in value caused by changes in prevailing interest rates
- --------------------------------------------------------------------------------
B-57
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
or market conditions. Should interest rates move unexpectedly, the Fund 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.
Dollar Rolls: The Fund enters into mortgage dollar rolls in which the Fund sells
mortgage securities for delivery in the current month, realizing a gain or loss
and simultaneously contracts to repurchase somewhat similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund forgoes principal and interest paid on the securities. The Fund is
compensated by the interest earned on the cash proceeds of the initial sale and
by the lower repurchase price at the future date. The difference between the
sales proceeds and the lower repurchase price is recorded as interest income.
The Fund maintains a segregated account, the dollar value of which is at least
equal to its obligations in respect of dollar rolls.
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.
Reclassification of Capital Accounts: The Fund 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 fiscal year
ended September 30, 1998 the application of this statement increased accumulated
net realized gain on investments by $17,605, increased paid-in capital by $7,210
and decreased undistributed net investment income by $24,815. Net investment
income, net realized gains, and net assets were not affected by these
reclassifications.
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.
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 60 months
from the date each of the Funds commenced investment operations.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. Effective June 1, 1998, The Prudential Investment Corporation ('PIC')
replaced Jennison Associates LLC as subadviser. Pursuant to a subadvisory
agreement between PIFM and 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 and employees 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 average daily net assets of the Fund.
The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C shares
of the Fund through May 31, 1998. Prudential Investment Management Services LLC
('PIMS') became the distributor of the Fund effective June 1, 1998 and is
serving the Fund under the same terms and conditions as under the arrangement
with PSI. The Fund compensated PSI and PIMS 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 distributions fees are accrued daily
- --------------------------------------------------------------------------------
B-58
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
and payable monthly. No distribution or service fees are paid to PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS 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 year ended
September 30, 1998.
PSI and PIMS have advised the Fund that they received approximately $2,900 in
front-end sales charges resulting from sales of Class A shares during the year
ended September 30, 1998. From these fees, PSI and PIMS paid such sales charges
to affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended September 30, 1998,
they received approximately $1,500 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders.
Jennison, PIFM, PIMS, PIC 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') with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. 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 did not borrow any amounts pursuant to the Agreement
during the year ended September 30, 1998. 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.
The Agreement expired on December 30, 1997 and has been extended through
December 29, 1998 under the same terms.
- ------------------------------------------------------------
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, 1998,
the Fund incurred fees of approximately $258,400 for the services of PMFS. As of
September 30, 1998, approximately $21,800 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 nonaffiliates.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1998 aggregated $410,050,166 and $416,492,547,
respectively. Purchases and sales of U.S. government obligations were
$221,801,335 and $266,836,956, respectively.
The cost basis of investments for federal income tax purposes is $194,761,410.
As of September 30, 1998, net unrealized depreciation for federal income tax
purposes was $4,158,297 (gross unrealized depreciation--$4,087,735, gross
unrealized depreciation--$8,246,032).
During the year ended September 30, 1998, the Fund entered into financial
futures contracts. Details of open contracts at September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration September 30, Trade Appreciation/
Contracts Type Date 1998 Date (Depreciation)
- ----------- ---------------- ------------ ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Long Position:
3 U.S.T-Bond Dec. 98 $ 394,406 $ 376,594 $ 17,812
3 U.S. T-Note Dec. 98 344,859 334,500 10,359
115 S&P 500 Dec. 98 29,497,500 28,811,437 686,063
-------
$714,234
=======
</TABLE>
- ------------------------------------------------------------
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,
1998, the Fund had a 4.1% undivided interest in the repurchase agreements in the
joint account. The undivided interest represented $30,406,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefore was as follows:
Warburg Dillon Read LLC, 5.52%, in the principal amount of $210,000,000,
repurchase price $210,032,200, due 10/1/98. The value of the collateral
including accrued interest was $214,255,819.
Bear Stearns & Co., 5.58%, in the principal amount of $210,000,000, repurchase
price $210,032,550, due 10/1/98. The value of the collateral including accrued
interest was $214,893,617.
Credit Suisse First Boston Corp., 5.55%, in the principal amount of
$107,606,000, repurchase price $107,622,589, due 10/1/98. The value of the
collateral including accrued interest was $111,084,883.
- --------------------------------------------------------------------------------
B-59
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Goldman Sachs & Co., 5.45%, in the principal amount of $210,000,000, repurchase
price $210,031,792, due 10/1/98. The value of the collateral including accrued
interest was $214,200,293.
- ------------------------------------------------------------
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 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. Prior to November 2, 1998, Class C
shares were sold with a contingent deferred sales charge of 1% during the first
year. Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. 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 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 324,143 $ 4,450,999
Shares issued in reinvestment of
dividends and distributions...... 8,312 107,053
Shares reacquired.................. (159,004) (2,196,936)
---------- ------------
Net increase in shares
outstanding...................... 173,451 $ 2,361,116
========== ============
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
========== ============
<CAPTION>
Class B Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 224,444 $ 3,091,278
Shares issued in reinvestment of
dividends and distributions...... 2,309 29,757
Shares reacquired.................. (11,806) (161,521)
---------- ------------
Net increase in shares
outstanding...................... 214,947 $ 2,959,514
---------- ------------
---------- ------------
November 7, 1996(a)
through September 30, 1997:
Shares sold........................ 14,903 $ 197,257
Shares issued in reinvestment of
dividends and distributions...... 1 9
Shares reacquired.................. (75) (964)
---------- ------------
Net increase in shares
outstanding...................... 14,829 $ 196,302
---------- ------------
---------- ------------
<CAPTION>
Class C
- -------
Year ended September 30, 1998:
Shares sold........................ 22,836 $ 314,699
Shares issued in reinvestment of
dividends and distributions...... 127 1,642
Shares reacquired.................. (1,859) (25,489)
---------- ------------
Net increase in shares
outstanding...................... 21,104 $ 290,852
========== ============
November 7, 1996(a)
through September 30, 1997:
Shares sold........................ 365 $ 5,122
Shares issued in reinvestment of
dividends and distributions...... 1 9
Shares reacquired.................. -- --
---------- ------------
Net increase in shares
outstanding...................... 366 $ 5,131
========== ============
<CAPTION>
Class Z
- -------
Year ended September 30, 1998:
Shares sold........................ 6,947,226 $ 97,448,833
Shares issued in reinvestment of
dividends and distributions...... 1,437,147 18,524,825
Shares reacquired.................. (7,211,135) (98,037,987)
---------- ------------
Net increase in shares
outstanding...................... 1,173,238 $ 17,935,671
========== ============
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)
========== ============
</TABLE>
- ---------------
(a) Commencement of offering of Class A, B, and C shares.
- --------------------------------------------------------------------------------
B-60
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Of the shares outstanding at September 30, 1998, PIFM and affiliates owned
119.544 Class Z shares of the Fund.
- ------------------------------------------------------------
Note 7. Reorganization
On August 26, 1997, the Board of Trustees of the Portfolio approved an Agreement
and Plan of Conversion and Liquidation (the 'Plan of Reorganization'). The Plan
of Reorganization was approved by applicable shareholders on January 15, 1998.
Under the Plan of Reorganization, all of the assets of the Portfolio were
transferred to Prudential Jennison Series Fund, Inc.--Prudential Jennison Active
Balanced Fund in exchange for Class A, Class B, Class C and Class Z shares of
the Fund and the assumption by the Fund of all of the liabilities, if any, of
the Portfolio.
On May 14, 1998, the Board of Directors approved a change of the investment
company's name from Prudential Jennison Series Fund, Inc. to The Prudential
Investment Portfolios, Inc. and a change in the series name of the Prudential
Jennison Active Balanced Fund series to the Prudential Active Balanced Fund (the
Fund), effective June 1, 1998.
- --------------------------------------------------------------------------------
B-61
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Financial Highlights PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------------------------------- -------------------------------
November 7, November 7,
1996(a) 1996(a)
Year Ended Through Year Ended Through
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 14.41 $ 13.40 $ 14.34 $ 13.40
----- ----- ----- -----
Income from investment operations:
Net investment income............................ .44 .21(b) .27 .19(b)
Net realized and unrealized gain on investment
transactions.................................. (.20) 1.97 (.14) 1.92
----- ----- ----- -----
Total from investment operations.............. .24 2.18 .13 2.11
----- ----- ----- -----
Less distributions:
Dividends from net investment income............. (.32) (.39) (.21) (.39)
Distributions from net realized gains............ (1.04) (.78) (1.04) (.78)
----- ----- ----- -----
Total distributions........................... (1.36) (1.17) (1.25) (1.17)
----- ----- ----- -----
Net asset value, end of period................... $ 13.29 $ 14.41 $ 13.22 $ 14.34
===== ===== ===== =====
TOTAL RETURN(d).................................. 1.93% 17.48% 1.10% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $ 3,218 $ 990 $ 3,038 $ 213
Average net assets (000)......................... $ 2,090 $ 100 $ 1,285 $ 71
Ratios to average net assets:
Expenses, including distribution fees......... 1.28% 1.31%(c) 2.03% 2.06%(c)
Expenses, excluding distribution fees......... 1.03% 1.06%(c) 1.03% 1.06%(c)
Net investment income......................... 2.72% 2.69%(c) 1.95% 1.94%(c)
Portfolio turnover rate....................... 256% 50% 256% 50%
<CAPTION>
Class C
-------------------------------
November 7,
1996(a)
Year Ended Through
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 14.34 $ 13.40
----- -----
Income from investment operations:
Net investment income............................ .48 .13(b)
Net realized and unrealized gain on investment
transactions.................................. (.35) 1.98
----- -----
Total from investment operations.............. .13 2.11
----- -----
Less distributions:
Dividends from net investment income............. (.21) (.39)
Distributions from net realized gains............ (1.04) (.78)
----- -----
Total distributions........................... (1.25) (1.17)
----- -----
Net asset value, end of period................... $ 13.22 $ 14.34
===== =====
TOTAL RETURN(d).................................. 1.10% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $ 284 $ 5
Average net assets (000)......................... $ 118 $ 1
Ratios to average net assets:
Expenses, including distribution fees......... 2.03% 2.06%(c)
Expenses, excluding distribution fees......... 1.03% 1.06%(c)
Net investment income......................... 2.04% 1.94%(c)
Portfolio turnover rate....................... 256% 50%
</TABLE>
- ---------------
(a) Commencement of offering of Class A, B and C shares.
(b) Calculated based upon weighted average shares outstanding during the year.
(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.
- --------------------------------------------------------------------------------
*See Note 7. B-62
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Financial Highlights PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
-----------------------------------------------------------
Year Ended September 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 14.45 $ 13.01 $ 12.46 $ 10.92 $ 11.05
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income............................ .38 .39(c) .29(a) .33(a) .24(a)
Net realized and unrealized gain (loss) on
investment transactions....................... (.12) 2.22 .81 1.54 (.12)
-------- -------- -------- -------- -------
Total from investment operations.............. .26 2.61 1.10 1.87 .12
-------- -------- -------- -------- -------
Less distributions:
Dividends from net investment income............. (.35) (.39) (.37) (.29) (.14)
Distributions from net realized gains............ (1.04) (.78) (.18) (.04) (.11)
-------- -------- -------- -------- -------
Total distributions........................... (1.39) (1.17) (.55) (.33) (.25)
-------- -------- -------- -------- -------
Net asset value, end of period................... $ 13.32 $ 14.45 $ 13.01 $ 12.46 $ 10.92
======== ======== ======== ======== =======
TOTAL RETURN(b).................................. 2.12% 21.34% 9.11% 17.66% 1.07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $161,838 $158,672 $153,588 $133,352 $81,176
Average net assets (000)......................... $177,443 $154,199 $142,026 $104,821 $58,992
Ratios to average net assets:
Expenses, including distribution fees......... 1.03% 1.06% 1.00%(a) 1.00%(a) 1.00%(a)
Expenses, excluding distribution fees......... 1.03% 1.06% 1.00%(a) 1.00%(a) 1.00%(a)
Net investment income......................... 2.99% 2.94% 3.09%(a) 3.53%(a) 3.06%(a)
Portfolio turnover rate....................... 256% 50% 51% 30% 40%
</TABLE>
- ---------------
(a) Net of expense subsidy.
(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. Total return includes the effect of expense subsidies where
applicable.
(c) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
*See Note 7. B-63
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.*
Report of Independant Accountants PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
The Prudential Investment Portfolios, Inc.--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 The Prudential Investment
Portfolios, Inc.--Prudential Active Balanced Fund (the 'Fund,' one of the
portfolios constituting The Prudential Investment Portfolios, Inc.) (formerly
the Prudential Dryden Fund--Prudential Active Balanced Fund and The Prudential
Institutional Fund--Prudential Active Balanced Fund) at September 30, 1998, the
results of its operations for the year then ended, and the changes in its net
assets and the financial highlights for each of the two years in the period 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 audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audits 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 audits, which included confirmation of securities at
September 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above. The accompanying financial
highlights for each of the three periods in the period ended September 30, 1996
were audited by other independent accountants, whose opinion dated November 13,
1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
- --------------------------------------------------------------------------------
*See Note 7. B-64
See Notes to Financial Statements.
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
Portfolio of Investments as
of September 30, 1998
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--96.7%
COMMON STOCKS--96.7%
- ---------------------------------------------------------------
Banks & Financial Services--12.1%
682,200 Associates First Capital Corp. $ 44,513,550
943,800 Chase Manhattan Corp. 40,819,350
523,500 Citicorp 48,652,781
213,600 Fleet Financial Group, Inc. 15,686,250
900,450 MBNA Corp. 25,775,381
389,200 Merrill Lynch & Co., Inc. 18,438,350
566,690 Morgan Stanley, Dean Witter & Co. 24,403,088
672,600 Schwab (Charles) Corp. 26,483,625
707,550 Washington Mutual, Inc. 23,879,813
--------------
268,652,188
- ---------------------------------------------------------------
Business Services--2.6%
660,300 Omnicom Group, Inc. 29,713,500
323,000 Xerox Corp. 27,374,250
--------------
57,087,750
- ---------------------------------------------------------------
Computer Systems/Peripherals--7.0%
1,036,200 Compaq Computer Corp. 32,769,825
614,700 Dell Computer Corp.(a) 40,416,525
706,200 Hewlett-Packard Co. 37,384,462
350,600 International Business Machines
Corp. 44,876,800
--------------
155,447,612
- ---------------------------------------------------------------
Diversified Operations--2.9%
820,200 General Electric Co. 65,257,163
- ---------------------------------------------------------------
EDP Software & Services--10.0%
285,000 Cadence Design Systems, Inc.(a) 7,285,313
1,074,400 HBO & Co. 31,023,300
571,000 Intuit, Inc.(a) 26,587,187
577,700 Microsoft Corp.(a) 63,583,106
1,673,600 Oracle Systems Corp.(a) $ 48,743,600
730,239 Platinum Technology, Inc.(a) 13,144,302
780,000 Rational Software Corp.(a) 13,113,750
459,000 SAP AG (ADR)(Germany) 17,872,313
--------------
221,352,871
- ---------------------------------------------------------------
Electronic Components--4.1%
521,900 Intel Corp. 44,752,925
62,100 International Rectifier Corp.(a) 318,263
864,100 Texas Instruments, Inc. 45,581,275
--------------
90,652,463
- ---------------------------------------------------------------
Hotels--0.6%
502,700 Promus Hotel Corp.(a) 13,855,669
- ---------------------------------------------------------------
Industrial Technology/Instruments--3.9%
865,500 Applied Materials, Inc.(a) 21,853,875
747,800 KLA Tencor Corp.(a) 18,601,525
910,400 Symbol Technologies, Inc. 46,714,900
--------------
87,170,300
- ---------------------------------------------------------------
Insurance--6.7%
988,000 ACE, Ltd. 29,640,000
418,300 American International Group,
Inc. 32,209,100
976,766 Mutual Risk Management, Ltd. 34,553,097
725,300 Provident Companies, Inc. 24,478,875
545,800 UNUM Corp. 27,119,438
--------------
148,000,510
- ---------------------------------------------------------------
Media--3.3%
1,550,800 CBS Corp. 37,606,900
746,200 Clear Channel Communications,
Inc.(a) 35,444,500
--------------
73,051,400
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-65
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
Portfolio of Investments as
of September 30, 1998
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
Networking--4.0%
764,000 Ascend Communications, Inc.(a) $ 34,762,000
874,650 Cisco Systems, Inc.(a) 54,064,303
--------------
88,826,303
- ---------------------------------------------------------------
Oil Services--1.0%
442,800 Schlumberger, Ltd. 22,278,375
- ---------------------------------------------------------------
Pharmaceuticals--18.2%
985,600 American Home Products Corp. 51,620,800
878,000 Eli Lilly & Co. 68,758,375
437,100 Merck & Co., Inc. 56,631,769
939,800 Monsanto Co. 52,981,225
478,500 Pfizer, Inc. 50,691,094
144,700 Pharmacia & Upjohn, Inc. 7,262,131
631,800 Schering Plough Corp. 65,430,787
682,400 Warner-Lambert Co. 51,521,200
--------------
404,897,381
- ---------------------------------------------------------------
Restaurants--1.5%
565,900 McDonald's Corp. 33,777,156
- ---------------------------------------------------------------
Retail--8.7%
431,712 Abercrombie & Fitch Co.(a) 18,995,328
890,508 Dollar General Corp. 23,709,762
615,350 Gap, Inc. 32,459,712
1,477,600 Home Depot, Inc. 58,365,200
745,300 Kohl's Corp.(a) 29,066,700
1,051,500 Staples, Inc.(a) 30,887,813
--------------
193,484,515
- ---------------------------------------------------------------
Telecommunications--7.1%
741,300 AirTouch Communications, Inc.(a) 42,254,100
1,942,400 MCI WorldCom, Inc. 94,934,800
633,300 Qwest Communications
International, Inc.(a) 19,830,206
--------------
157,019,106
Telecommunications Equipment--2.5%
412,600 Nokia Corp. (ADR)(Finland) $ 32,363,312
612,600 Tellabs, Inc.(a) 24,389,138
--------------
56,752,450
- ---------------------------------------------------------------
Trucking & Shipping--0.5%
270,600 FDX Corp. 12,210,825
Total long-term investments
(cost $1,951,570,244) 2,149,774,037
--------------
- ---------------------------------------------------------------
SHORT-TERM INVESTMENTS--3.3%
Moody's Principal
Rating Amount
(Unaudited) (000)
- ---------------------------------------------------------------
Commercial Paper--2.4%
P-1 $ 52,714 Chevron U.S.A., Inc.
5.50%, 10/1/98
(cost $52,714,000) 52,714,000
- ---------------------------------------------------------------
U.S. Government Securities--0.9%
United States Treasury
Bills
20,000 4.275%, 12/31/98
(cost $19,783,875) 19,783,875
Total short-term
investments
(cost $72,497,875) 72,497,875
- ---------------------------------------------------------------
Total Investments--100.0%
(cost $2,024,068,119;
Note 4) 2,222,271,912
Other assets in excess
of
liabilities 215,618
---------------
Net Assets--100% $ 2,222,487,530
===============
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-66
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Statement of Assets and Liabilities PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1998
<S> <C>
Investments, at value (cost $2,024,068,119)............................................................ $2,222,271,912
Receivable for investments sold........................................................................ 19,435,409
Receivable for Series shares sold...................................................................... 7,620,008
Dividends and interest receivable...................................................................... 1,248,543
Deferred expenses and other assets..................................................................... 117,160
----------------
Total assets........................................................................................ 2,250,693,032
----------------
Liabilities
Bank overdraft......................................................................................... 221,509
Payable for investments purchased...................................................................... 17,275,137
Payable for Series shares reacquired................................................................... 8,479,636
Management fee payable................................................................................. 1,081,955
Distribution fees payable.............................................................................. 699,816
Accrued expenses and other liabilities................................................................. 447,449
----------------
Total liabilities................................................................................... 28,205,502
----------------
Net Assets............................................................................................. $2,222,487,530
================
Net assets were comprised of:
Common stock, at par................................................................................ $ 154,702
Paid-in capital in excess of par.................................................................... 1,924,037,776
----------------
1,924,192,478
Accumulated net realized gain on investments........................................................ 100,091,259
Net unrealized appreciation on investments.......................................................... 198,203,793
----------------
Net assets, September 30, 1998......................................................................... $2,222,487,530
================
Class A:
Net asset value and redemption price per share
($446,996,170 / 30,963,191 shares of common stock issued and outstanding)........................ $14.44
Maximum sales charge (5% of offering price)......................................................... .76
----------------
Maximum offering price to public.................................................................... $15.20
================
Class B:
Net asset value, offering price and redemption price per share
($708,463,180 / 50,218,577 shares of common stock issued and outstanding)........................ $14.11
================
Class C:
Net asset value, offering price and redemption price per share
($45,125,515 / 3,198,724 shares of common stock issued and outstanding).......................... $14.11
================
Class Z:
Net asset value, offering price and redemption price per share
($1,021,902,665 / 70,321,313 shares of common stock issued and outstanding)...................... $14.53
================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-67
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Operations
- ------------------------------------------------------------
Year Ended
Net Investment Income (Loss) September 30, 1998
Income
Dividends (net of foreign withholding
taxes of $93,491).................. $ 11,248,612
Interest.............................. 2,241,927
----------------
Total income....................... 13,490,539
----------------
Expenses
Management fee........................ 9,927,436
Distribution fee--Class A............. 627,794
Distribution fee--Class B............. 5,578,224
Distribution fee--Class C............. 353,371
Transfer agent's fees and expenses.... 2,538,000
Reports to shareholders............... 460,000
Registration fees..................... 389,000
Custodian's fees and expenses......... 210,000
Legal fees and expenses............... 68,000
Amortization of deferred organization
expenses........................... 37,967
Audit fee and expenses................ 20,000
Insurance expense..................... 11,000
Directors' fees....................... 8,000
Miscellaneous......................... 16,356
----------------
Total expenses..................... 20,245,148
----------------
Net investment loss...................... (6,754,609)
----------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment
transactions.......................... 131,020,013
Net change in unrealized appreciation on
investments........................... (190,394,651)
----------------
Net loss on investments.................. (59,374,638)
----------------
Net Decrease in Net Assets
Resulting from Operations................ $ (66,129,247)
================
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
Increase (Decrease) in Year Ended September 30,
Net Assets 1998 1997
Operations
Net investment loss......... $ (6,754,609) $ (3,451,314)
Net realized gain on
investments.............. 131,020,013 90,453,012
Net change in unrealized
appreciation of
investments.............. (190,394,651) 224,732,097
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations............... (66,129,247) 311,733,795
-------------- --------------
Distributions from net realized
capital gains (Note 1)
Class A..................... (12,677,688) --
Class B..................... (37,861,226) --
Class C..................... (2,330,817) --
Class Z..................... (55,817,957) --
-------------- --------------
(108,687,688) --
-------------- --------------
Series share transactions (net
of conversion) (Note 5)
Net proceeds from shares
sold (Note 6)............ 1,822,040,223 859,180,110
Net asset value of shares
issued in reinvestment of
distributions............ 106,812,422 --
Cost of shares reacquired... (730,978,040) (666,161,401)
-------------- --------------
Net increase in net assets
from Series share
transactions............. 1,197,874,605 193,018,709
-------------- --------------
Total increase................. 1,023,057,670 504,752,504
Net Assets
Beginning of year.............. 1,199,429,860 694,677,356
-------------- --------------
End of year.................... $2,222,487,530 $1,199,429,860
============== ==============
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-68
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
Prudential Jennison Growth Fund (the 'Series') is a separately managed series of
The Prudential Investment Portfolios, Inc., formerly Prudential Jennison Series
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 of the Series commenced on November 2, 1995.
The Series' 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.
- --------------------------------------------------------------------------------
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 such
exchange or system on the day of valuation, or, if there was no sale on such
day, at the mean between the last bid and asked prices on such day or at the bid
price on such day 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 by the Manager, in consultation with the Subadviser,
to be over-the-counter, are valued by an independent pricing agent or principal
market maker. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager and the Subadviser to be over-the-counter, are
valued at the mean between the last reported bid and asked prices provided by a
principal market maker. Options on securities and indices traded on an exchange
are valued at the mean between the most recently quoted bid and asked prices on
such exchange. Futures contracts and options thereon traded on a commodities
exchange or board of trade are valued at the last sales price at the close of
trading on such exchange or board of trade or, if there was no sale on the
applicable commodities exchange or board of trade on such day, at the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade. Securities for which market quotations are not readily available,
other than private placements, are valued at a price supplied by an independent
pricing agent, which is, in the opinion of such pricing agent, representative of
the market value of such securities as of the time of determination of net asset
value, or using a methodology developed by an independent pricing agent, which
is, in the judgment of the Manager and the Subadviser, able to produce prices
which are representative of market value.
Short-term securities which mature in more than 60 days, for which market
quotations are readily available, are valued at current market quotations as
provided by an independent pricing agent or principal market maker. Short-term
securities which mature in 60 days or less are valued at cost with interest
accrued or discount amortizied to the date of maturity, unless the Board of
Directors determines that such valuation does not represent fair value.
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.
- --------------------------------------------------------------------------------
B-69
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
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, 1998, the Series reclassified current net operating losses and
adjustments due to acquisition by decreasing accumulated net investment loss by
$6,754,609, decreasing accumulated net realized gains on investments by
$3,517,586 and decreasing paid-in capital by $3,237,023. Net investment income,
net realized gains and net assets were not affected by this charge.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with 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 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 had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS 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 or PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Series compensated PSI and PIMS 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, 1998.
PSI and PIMS have advised the Series that they received approximately $1,447,800
in front-end sales charges resulting from sales of Class A shares during the
year ended September 30, 1998. From these fees, PSI and PIMS paid such sales
charges to affiliated broker-dealers which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI and PIMS have advised the Series that for the fiscal year ended September
30, 1998, they received approximately $793,500 and $14,200 in contingent
deferred sales charges imposed upon certain redemptions by Class B and C
shareholders, respectively.
PIFM, PIMS, 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'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. 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 during the year
ended September 30, 1998. 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. The Agreement
expired on December 30, 1997 and has been extended through December 29, 1998
under the same terms.
- --------------------------------------------------------------------------------
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, 1998,
the Series incurred fees of approximately $2,279,000 for the services of PMFS.
As of September 30, 1998, approximately $264,000 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 nonaffiliates.
For the year ended September 30, 1998, PSI earned approximately $17,000 in
brokerage commissions from portfolio transactions executed on behalf of the
Series.
- --------------------------------------------------------------------------------
B-70
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1998 were $1,900,121,642 and $932,574,857,
respectively.
The cost of investments for federal income tax purposes at September 30, 1998
was $2,025,131,763 and, accordingly, net unrealized appreciation of investments
for federal income tax purposes was $197,140,149 (gross unrealized
appreciation--$356,106,924; gross unrealized depreciation--$158,966,775).
- --------------------------------------------------------------------------------
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. Prior to November 2, 1998, Class C
shares were sold with a contingent deferred sales charge of 1% during the first
year. Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class Z shares are not subject to any sales or redemption charge and are
offered 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. Of the shares outstanding at September 30, 1998, 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, 1998:
Shares sold........................ 14,958,226 $ 229,811,039
Shares issued due to merger (Note
6)............................... 15,525,419 255,703,652
Shares issued in reinvestment of
distributions.................... 913,659 12,215,617
Shares reacquired.................. (10,632,449) (163,008,985)
----------- -------------
Net increase in shares outstanding
before conversion................ 20,764,855 334,721,323
Shares issued upon conversion from
Class B.......................... 777,059 11,419,782
----------- -------------
Net increase in shares
outstanding...................... 21,541,914 $ 346,141,105
=========== =============
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
=========== =============
Class B Shares Amount
- ------- ----------- -------------
Year ended September 30, 1998:
Shares sold........................ 22,754,015 $ 342,894,551
Shares issued due to merger (Note
6)............................... 7,486,124 120,751,178
Shares issued in reinvestment of
distributions.................... 2,776,715 36,513,797
Shares reacquired.................. (9,639,289) (143,137,800)
----------- -------------
Net increase in shares outstanding
before conversion................ 23,377,565 357,021,726
Shares reacquired upon conversion
into
Class A.......................... (793,565) (11,419,782)
----------- -------------
Net increase in shares
outstanding...................... 22,584,000 $ 345,601,944
=========== =============
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
=========== =============
- --------------------------------------------------------------------------------
B-71
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
Class C
- -------
Year ended September 30, 1998:
Shares sold........................ 1,687,844 $ 25,645,005
Shares issued due to merger (Note
6)............................... 260,502 4,201,896
Shares issued in reinvestment of
distributions.................... 172,793 2,272,229
Shares reacquired.................. (578,482) (8,683,902)
----------- -------------
Net increase in shares
outstanding...................... 1,542,657 $ 23,435,228
=========== =============
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
=========== =============
Class Z Shares Amount
- ------- ----------- -------------
Year ended September 30, 1998:
Shares sold........................ 52,992,987 $ 825,209,682
Shares issued due to merger (Note
6)............................... 1,075,632 17,823,220
Shares issued in reinvestment of
distributions.................... 4,155,680 55,810,779
Shares reacquired.................. (27,380,773) (416,147,353)
----------- -------------
Net increase in shares
outstanding...................... 30,843,526 $ 482,696,328
=========== =============
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
=========== =============
Note 6. Acquisition of the Prudential Multi-Sector Fund, Inc.
On June 26, 1998, the Series' acquired all of the assets of the Prudential
Multi-Sector Fund, Inc., in exchange for shares in the Series pursuant to a plan
of reorganization (the 'Plan') approved by the shareholders of the Prudential
Multi-Sector Fund, Inc. at a shareholder meeting held on June 24, 1998. The
acquisition was accomplished by a tax-free exchange of 15,525,419 Class A
shares, 7,486,124 Class B shares, 260,502 Class C shares and 1,075,632 Class Z
shares (valued at $398,479,946 in aggregate) for the Class A, B, C and Z shares
of Prudential Multi-Sector Fund, Inc. outstanding on June 26, 1998. The
aggregate net assets of the Series and Prudential Multi-Sector Fund, Inc.
immediately before the acquisition were $1,794,908,971 and $398,479,946,
respectively (including $54,822,476 of net unrealized appreciation for the
Prudential Multi-Sector Fund, Inc.) thereby resulting in combined net assets of
$2,193,388,917 immediately after the reorganization.
- --------------------------------------------------------------------------------
B-72
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------- -------------
November 2,
1995(a) Year Ended
Year Ended September 30, Through September 30,
------------------------------- September 30, -------------
1998 1997 1996 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................... $ 15.39 $ 10.97 $ 10.00 $ 15.18
------------- ------------- ------ -------------
Income from investment operations
Net investment income (loss)(c)........................ (.04) (.03) (.03) (.15)
Net realized and unrealized gain on investment
transactions........................................ .40 4.45 1.00 .39
------------- ------------- ------ -------------
Total from investment operations.................... .36 4.42 .97 .24
Less distributions
Distributions from net realized gains.................. (1.31) -- -- (1.31)
------------- ------------- ------ -------------
Net asset value, end of period......................... $ 14.44 $ 15.39 $ 10.97 $ 14.11
============= ============= ====== =============
TOTAL RETURN(b)........................................ 3.02% 40.29% 9.70% 2.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................ $ 446,996 $ 145,022 $85,440 $ 708,463
Average net assets (000)............................... $ 251,118 $ 105,982 $70,667 $ 557,823
Ratios to average net assets:
Expenses, including distribution fees............... 1.08% 1.09% 1.23%(d) 1.83%
Expenses, excluding distribution fees............... .83% .84% .98%(d) .83%
Net investment income (loss)........................ (.26)% (.25)% (.37)%(d) (1.01)%
For Class A, B, C and Z shares:
Portfolio turnover rate............................. 58% 63% 42% 58%
<CAPTION>
Class B
-------------
November 2,
Year Ended 1995(a)
September 30, Through
------------- September 30,
1997 1996
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................... $ 10.89 $ 10.00
------------- -------------
Income from investment operations
Net investment income (loss)(c)........................ (.12) (.10)
Net realized and unrealized gain on investment
transactions........................................ 4.41 .99
------------- -------------
Total from investment operations.................... 4.29 .89
Less distributions
Distributions from net realized gains.................. -- --
------------- -------------
Net asset value, end of period......................... $ 15.18 $ 10.89
============= =============
TOTAL RETURN(b)........................................ 39.39% 8.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................ $ 419,405 $ 231,541
Average net assets (000)............................... $ 299,476 $ 162,412
Ratios to average net assets:
Expenses, including distribution fees............... 1.84% 1.98%(d)
Expenses, excluding distribution fees............... .84% .98%(d)
Net investment income (loss)........................ (1.00)% (1.12)%(d)
For Class A, B, C and Z shares:
Portfolio turnover rate............................. 63% 42%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(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 returns for periods of less than a full year are not
annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-73
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
------------------------------------------------- -------------
November 2,
1995(a) Year Ended
Year Ended September 30, Through September 30,
------------------------------- September 30, -------------
1998 1997 1996 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................... $ 15.18 $ 10.89 $ 10.00 $ 15.45
------ ------------- ------ -------------
Income from investment operations
Net investment income (loss)(c)........................ (.15) (.12) (.10) --
Net realized and unrealized gain on investment
transactions........................................ .39 4.41 .99 .39
------ ------------- ------ -------------
Total from investment operations.................... .24 4.29 .89 .39
------ ------------- ------ -------------
Less distributions..................................... -- -- -- --
Distributions from net realized gains............... (1.31) -- -- (1.31)
------ ------------- ------ -------------
Net asset value, end of period......................... $ 14.11 $ 15.18 $ 10.89 $ 14.53
====== ============= ====== =============
TOTAL RETURN(b)........................................ 2.21% 39.39% 8.90% 3.22%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................ $45,126 $ 25,134 $15,281 $ 1,021,903
Average net assets (000)............................... $35,337 $ 18,248 $12,550 $ 810,296
Ratios to average net assets:
Expenses, including distribution fees............... 1.83% 1.84% 1.98%(d) .83%
Expenses, excluding distribution fees............... .83% .84% .98%(d) .83%
Net investment income (loss)........................ (1.01)% (1.00)% (1.12)%(d) (.01)%
<CAPTION>
Class Z
-------------
April 15,
Year Ended 1996(a)
September 30, Through
------------- September 30,
1997 1996
-------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................... $ 10.98 $ 10.32
------------- -------------
Income from investment operations
Net investment income (loss)(c)........................ -- (.02)
Net realized and unrealized gain on investment
transactions........................................ 4.47 .68
------------- -------------
Total from investment operations.................... 4.47 .66
------------- -------------
Less distributions..................................... -- --
Distributions from net realized gains............... -- --
------------- -------------
Net asset value, end of period......................... $ 15.45 $ 10.98
============= =============
TOTAL RETURN(b)........................................ 40.71% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................ $ 609,869 $ 362,416
Average net assets (000)............................... $ 455,684 $ 26,829
Ratios to average net assets:
Expenses, including distribution fees............... .84% .98%(d)
Expenses, excluding distribution fees............... .84% .98%(d)
Net investment income (loss)........................ -- (.12)%(d)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(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 returns for periods of less than a full year are not
annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-74
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Report of Independent Accountants PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
The Prudential Investment Portfolios, 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 The Prudential Investment
Portfolios, Inc., Prudential Jennison Growth Fund (the 'Fund', one of the
portfolios constituting The Prudential Investment Portfolios, Inc.) at September
30, 1998, the results of its operations for the year then ended, and the changes
in its net assets and the financial highlights for each of the two years in the
period 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 audits. We conducted our audits 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 audits, which included confirmation of securities at
September 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above. The accompanying financial
highlights for the period ended September 30, 1996 were audited by other
independent accountants, whose opinion dated November 4, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
- --------------------------------------------------------------------------------
B-75
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Portfolio of Investments as of September 30, 1998
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--85.2%
COMMON STOCKS--84.1%
- ---------------------------------------------------------------
Aerospace/Defense--6.1%
30,000 Lockheed Martin Corp. 3,024,375
90,140 Raytheon Co. 4,670,379
------------
7,694,754
- ---------------------------------------------------------------
Airlines--1.5%
18,800 Delta Airlines, Inc. 1,828,300
- ---------------------------------------------------------------
Aluminum--3.7%
35,200 Aluminum Co. of America 2,499,200
42,800 Reynolds Metals Co. 2,174,775
------------
4,673,975
- ---------------------------------------------------------------
Banking--7.0%
52,500 Chase Manhattan Corp. 2,270,625
32,800 Fleet Financial Group, Inc. 2,408,750
143,100 Hibernia Corp., Class A 2,066,006
24,100 J.P. Morgan & Co., Inc. 2,039,463
------------
8,784,844
- ---------------------------------------------------------------
Biotechnology--1.2%
42,600 Agouron Pharmaceuticals, Inc.(a) 1,467,037
- ---------------------------------------------------------------
Business Services--4.3%
24,900 Hertz Corp. 1,030,237
54,600 Ogden Corp. 1,552,688
112,000 Ryder System, Inc. 2,786,000
------------
5,368,925
- ---------------------------------------------------------------
Computer Systems/Peripherals--5.5%
53,157 Compaq Computer Corp. 1,681,090
28,200 Hewlett-Packard Co. 1,492,838
16,900 International Business Machines
Corp. 2,163,200
29,125 Symbol Technologies, Inc.(a) 1,494,477
------------
6,831,605
EDP/Software Services--0.8%
153,700 Intergraph Corp.(a) $ 999,050
- ---------------------------------------------------------------
Foods--1.8%
63,100 Dole Food Co., Inc. 2,279,487
- ---------------------------------------------------------------
Hotels--2.7%
136,600 Hilton Hotels Corp. 2,330,737
40,300 Promus Hotel Corp.(a) 1,110,769
------------
3,441,506
- ---------------------------------------------------------------
Household & Personal Care Products--1.1%
64,400 The Dial Corp. 1,328,250
- ---------------------------------------------------------------
Industrial Technology/Instruments--1.7%
83,600 Millipore Corp. 1,593,625
17,100 Varian Associates, Inc. 602,775
------------
2,196,400
- ---------------------------------------------------------------
Insurance--4.0%
55,800 CIGNA Corp. 3,689,775
27,500 NAC Re Corp. 1,354,375
------------
5,044,150
- ---------------------------------------------------------------
Machinery & Equipment--0.6%
36,100 Case Corp. 785,175
- ---------------------------------------------------------------
Motor Vehicles & Equipment--2.2%
49,200 General Motors Corp., Class H 2,690,625
- ---------------------------------------------------------------
Media--2.3%
84,200 CBS Corp. 2,041,850
19,131 Chris-Craft Industries, Inc.(a) 845,351
------------
2,887,201
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-76
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Portfolio of Investments as
of September 30, 1998
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
Oil Services--0.8%
35,900 McDermott International, Inc. $ 967,056
- ---------------------------------------------------------------
Paper & Forest Products--5.1%
84,000 Boise Cascade Corp.(a) 2,126,250
38,800 Champion International Corp. 1,214,925
117,000 Stone Container Corp.(a) 1,009,125
41,200 Temple-Inland, Inc. 1,972,450
------------
6,322,750
- ---------------------------------------------------------------
Petroleum--4.1%
40,400 Anadarko Petroleum Corp. 1,588,225
37,000 Burlington Resources, Inc. 1,382,875
59,500 Unocal Corp. 2,156,875
------------
5,127,975
- ---------------------------------------------------------------
Pharmaceuticals--0.8%
42,700 Vertex Pharmaceuticals, Inc.(a) 982,100
- ---------------------------------------------------------------
Photography/Image Technology--3.7%
38,000 Eastman Kodak Co. 2,937,875
70,000 Polaroid Corp. 1,719,375
------------
4,657,250
- ---------------------------------------------------------------
Publishing--6.6%
38,600 American Greetings Corp., Class A 1,527,113
18,900 McGraw-Hill Companies, Inc. 1,497,825
99,900 New York Times Co., Class A 2,747,250
49,300 Tribune Co. 2,480,406
------------
8,252,594
- ---------------------------------------------------------------
Real Estate Investment Trusts--1.1%
77,971 Meditrust Cos.-Paired Stock 1,330,380
Retail--6.5%
64,500 AutoZone, Inc.(a) $ 1,588,312
117,100 Boise Cascade Office Products
Corp.(a) 1,068,538
46,100 Sears, Roebuck & Co. 2,037,044
155,000 The Limited, Inc. 3,400,312
------------
8,094,206
- ---------------------------------------------------------------
Savings & Loan--1.0%
36,050 Washington Mutual, Inc. 1,216,688
- ---------------------------------------------------------------
Semiconductors--0.7%
91,700 National Semiconductor Corp.(a) 888,344
- ---------------------------------------------------------------
Specialty Chemicals--1.8%
90,500 Dexter Corp. 2,217,250
- ---------------------------------------------------------------
Steel & Metals--1.6%
83,600 USX-U.S. Steel Group, Inc. 1,995,950
- ---------------------------------------------------------------
Telecommunications--1.8%
13,200 MCI WorldCom, Inc.(a) 645,150
25,700 Qwest Communications International,
Inc.(a) 804,731
21,100 Tellabs, Inc.(a) 840,044
------------
2,289,925
- ---------------------------------------------------------------
Transportation--2.0%
34,400 FDX Corp.(a) 1,552,300
43,500 Knightsbridge Tankers Ltd. 935,250
------------
2,487,550
------------
Total common stocks
(cost $111,458,405) 105,131,302
------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-77
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Portfolio of Investments as
of September 30, 1998
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
PREFERRED STOCKS--1.1%
- ---------------------------------------------------------------
Steel and Metal--1.1%
33,300 USX-U.S. Steel Group, Inc.
Conv., 6.75%
(cost $1,593,525) $ 1,444,387
------------
Total long-term investments
(cost $113,051,930) 106,575,689
------------
SHORT-TERM INVESTMENTS--14.7%
- ---------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000)
COMMERCIAL PAPER--4.3%
P-1 $ 5,378 Ford Motor Credit Corp.
5.37%, 10/1/98
(cost $5,378,000) 5,378,000
-------------
U.S. GOVERNMENT SECURITIES--10.4%
United States Treasury
Bills
3,000(b) 4.90%, 10/8/98 2,997,200
10,000(b) 4.97%, 10/8/98 9,990,336
-------------
Total U.S. government
securities
(cost $12,987,536) 12,987,536
-------------
Total short-term
investments
(cost $18,365,536) 18,365,536
-------------
Total investments before
short sales--99.9%
(cost $131,417,466; Note 4) 124,941,225
-------------
COMMON STOCKS SOLD SHORT(a)--(9.7%)
Shares
- ---------------------------------------------------------------
Beverages--(0.9%)
(19,500) Coca-Cola Co. (1,123,687)
- ---------------------------------------------------------------
Foods--(1.1%)
(26,000) Campbell Soup Co. (1,304,875)
Household & Personal Care Products--(1.1%)
(19,700) Procter & Gamble Co. $ (1,397,469)
- ---------------------------------------------------------------
Industrial Technology/Instruments--(1.4%)
(28,500) Emerson Electric Co. (1,774,125)
- ---------------------------------------------------------------
Media--(1.0%)
(48,500) The Walt Disney Co. (1,227,656)
- ---------------------------------------------------------------
Petrolium International--(1.9%)
(12,200) Chevron Corp. (1,025,562)
(19,300) Exxon Corp. (1,354,619)
------------
(2,380,181)
- ---------------------------------------------------------------
Medical Products--(0.7%)
(17,900) Boston Scientific Corp.(a) (919,613)
- ---------------------------------------------------------------
Retail--(0.4%)
(13,000) Best Buy Co., Inc.(a) (539,500)
- ---------------------------------------------------------------
Specialty Chemicals--(1.2%)
(17,300) The Dow Chemical Co. (1,478,069)
------------
Total common stocks sold short
(proceeds at cost $13,809,611) (12,145,175)
------------
Total investments, net of short
sales--90.2% 112,796,050
Other assets in excess of
other liabilities--9.8% 12,253,831
------------
Net Assets--100% $125,049,881
============
- ---------------
(a) Non-income producing securities.
(b) $12,493,000 of principal amount pledged as collateral for short sales.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-78
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1998
<S> <C>
Investments, at value (cost $131,417,466)............................................................... $124,941,225
Cash.................................................................................................... 23,968
Receivable for securities sold short.................................................................... 13,809,611
Receivable for investments sold......................................................................... 1,529,202
Receivable for Series shares sold....................................................................... 270,704
Dividends and interest receivable....................................................................... 202,889
Other assets............................................................................................ 1,672
---------------
Total assets......................................................................................... 140,779,271
---------------
Liabilities
Investments sold short, at value (proceeds $13,809,611)................................................. 12,145,175
Payable for investments purchased....................................................................... 1,542,928
Due to broker for securities sold short................................................................. 1,502,069
Payable for Series shares reacquired.................................................................... 292,816
Accrued expenses........................................................................................ 102,412
Distribution fee payable................................................................................ 82,165
Management fee payable.................................................................................. 61,825
---------------
Total liabilities.................................................................................... 15,729,390
---------------
Net Assets.............................................................................................. $125,049,881
===============
Net assets were comprised of:
Common stock, at par................................................................................. $ 11,404
Paid-in capital in excess of par..................................................................... 120,646,123
---------------
120,657,527
Undistributed net investment income.................................................................. 290,719
Accumulated net realized gain on investments......................................................... 8,913,440
Net unrealized depreciation on investments........................................................... (4,811,805)
---------------
Net assets, September 30, 1998.......................................................................... $125,049,881
===============
Class A:
Net asset value and redemption price per share
($31,339,258 / 2,853,160 shares of common stock issued and outstanding)........................... $10.98
Maximum sales charge (5.0% of offering price)........................................................ .58
---------------
Maximum offering price to public..................................................................... $11.56
===============
Class B:
Net asset value, offering price and redemption price per share
($84,751,017 / 7,733,804 shares of common stock issued and outstanding)........................... $10.96
===============
Class C:
Net asset value, offering price and redemption price per share
($7,123,821 / 650,074 shares of common stock issued and outstanding).............................. $10.96
===============
Class Z:
Net asset value, offering price and redemption price per share
($1,835,785 / 166,828 shares of common stock issued and outstanding).............................. $11.00
===============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-79
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Statement of Operations
- --------------------------------------------------------------
Year Ended
Net Investment Income September 30, 1998
Income
Dividends (net of foreign withholding
taxes of $9,971)................... $ 2,158,603
Interest.............................. 1,314,600
---------------
Total income....................... 3,473,203
---------------
Expenses
Distribution fee--Class A............. 87,862
Distribution fee--Class B............. 934,652
Distribution fee--Class C............. 77,340
Management fee........................ 826,308
Transfer agent's fees and expenses.... 192,000
Custodian's fees and expenses......... 112,000
Registration fees..................... 100,000
Reports to shareholders............... 89,000
Dividends on securities sold short.... 71,634
Legal fees and expenses............... 38,000
Audit fees and expenses............... 20,000
Directors' fees....................... 8,000
Miscellaneous......................... 7,479
---------------
Total expenses..................... 2,564,275
---------------
Net investment income.................... 908,928
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............... 11,470,012
Financial futures transactions........ 101,894
Short sales........................... (794,668)
---------------
10,777,238
---------------
Net change in unrealized
appreciation/depreciation on:
Investments........................... (27,554,564)
Short sales........................... 1,706,026
---------------
(25,848,538)
---------------
Net loss on investments.................. (15,071,300)
---------------
Net Decrease in Net Assets Resulting from
Operations............................... $(14,162,372)
===============
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Statement of Changes in Net Assets
- --------------------------------------------------------------
Year Ended November 7, 1996(a)
Increase (Decrease) September 30, Through
in Net Assets 1998 September 30, 1997
Operations
Net investment income..... $ 908,928 $ 311,051
Net realized gain on
investment
transactions........... 10,777,238 4,530,772
Net change in unrealized
appreciation/depreciation
of investments......... (25,848,538) 21,036,733
------------- ----------------
Net increase (decrease) in
net
assets resulting from
operations............. (14,162,372) 25,878,556
------------- ----------------
Dividends and distributions
(Note 1):
Dividends from net
investment income
Class A................ (350,759) (173,413)
Class B................ (267,306) (87,383)
Class C................ (22,287) (9,043)
Class Z................ (17,381) (1,688)
------------- ----------------
(657,733) (271,527)
------------- ----------------
Distributions from net
realized gains
Class A................ (1,652,658) --
Class B................ (4,349,846) --
Class C................ (352,855) --
Class Z................ (39,211) --
------------- ----------------
(6,394,570) --
------------- ----------------
Series share transactions
(net of share conversions)
(Note 5)
Net proceeds from shares
sold................... 49,851,743 125,652,781
Net asset value of shares
issued in reinvestment
of
dividends and
distributions.......... 6,672,687 248,524
Cost of shares
reacquired............. (40,383,538) (21,384,670)
------------- ----------------
Net increase in net assets
from Series share
transactions........... 16,140,892 104,516,635
------------- ----------------
Total increase (decrease).... (5,073,783) 130,123,664
Net Assets
Beginning of period.......... 130,123,664 --
------------- ----------------
End of period(b)............. $ 125,049,881 $130,123,664
============= ================
- ---------------
(a) Commencement of investment operations.
(b) Includes undistributed
net investment income
of....................... $ 290,719 $ 39,524
------------- --------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-80
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
Prudential Jennison Growth & Income Fund (the 'Series') is a separately managed
series of The Prudential Investment Portfolios, Inc., formerly Prudential
Jennison Series 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 of
the Series 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.
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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 such
exchange or system on the day of valuation, or, if there was no sale on such
day, at the mean between the last bid and asked prices on such day or at the bid
price on such day 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 by the Manager, in consultation with the subadvisor,
to be over-the-counter, are valued by an independent pricing agent of principal
market maker. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager and the Subadvisor to be over-the-counter, are
valued at the mean between the last reported bid and asked prices provided by a
principal market maker. Options on securities and indices traded on an exchange
are valued at the mean between the most recently quoted bid and asked prices on
such exchange. Futures contracts and options thereon traded on a commodities
exchange or board of trade are valued at the last sales price at the close of
trading on such exchange or board of trade or, if there was no sale on the
applicable commodities exchange or board of trade on such day, at the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade. Securities for which market quotations are not readily available,
other than private placements, are valued at a price supplied by an independent
pricing agent, which is, in the opinion of such pricing agent, representative of
the market value of such securities as of the time of determination of net asset
value, or using a methodology developed by an independent pricing agent, which
is, in the judgment of the Manager and the Subadviser, able to produce prices
which are representative of market value.
Short-term securities which mature in more than 60 days, for which market
quotations are readily available, are valued at current market quotations as
provided by an independent pricing agent or principal market maker. Short-term
securities which mature in 60 days or less are valued at cost with interest
accrued or discount amortized to the date of maturity, unless the Board of
Directors determines that such valuation does not represent fair value.
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, 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 or commodities 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 or commodity.
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 market conditions or 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
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B-81
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Notes to Financial Statements
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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 remit 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.
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.
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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 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 had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS 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 or PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Series compensated PSI and PIMS 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 year ended
September 30, 1998.
PSI and PIMS have advised the Series that they received approximately $159,300
in front-end sales charges resulting from sales of Class A shares during the
year ended September 30, 1998. From these fees, PSI and PIMS paid such sales
charges to affiliated broker-dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI and PIMS have advised the Series that for the year ended September 30, 1998,
they received approximately $260,800 and $2,000 in contingent deferred sales
charges imposed upon certain redemptions by Class B and C shareholders,
respectively.
PIFM, PIMS, Jennison and PSI are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative
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B-82
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Notes to Financial Statements
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source of funding for capital share redemptions. The Series has not borrowed any
amounts pursuant to the Agreement during the year ended September 30, 1998. 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. The Agreement expired on December 30, 1997 and has
been extended through December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
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, 1998,
the Series incurred fees of approximately $160,900 for the services of PMFS. As
of September 30, 1998, approximately $15,000 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 nonaffiliates.
For the year ended September 30, 1998, PSI earned approximately $200 in
brokerage commissions from portfolio transactions executed on behalf of the
Series.
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Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1998 were $118,595,718 and $110,701,303,
respectively.
The cost basis of the investments for federal income tax purposes at September
30, 1998 was $132,607,134 and, accordingly, net unrealized depreciation of
investments for federal income tax purposes was $7,655,909 (gross unrealized
appreciation-$6,425,720; gross unrealized depreciation--$14,091,629).
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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. Prior to November 2,
1998, Class C shares were sold with a contingent deferred sales charge of 1%
during the first year. Effective November 2, 1998, Class C shares are sold with
a front-end sales charge of 1% and a contingent deferred sales charge of 1%
during the first 18 months. 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 were as follows:
Class A Shares Amount
- ------- ---------- -----------
Year ended September 30, 1998:
Shares sold........................... 1,121,704 $13,786,056
Shares issued in reinvestment of
dividends and distributions......... 162,663 1,913,429
Shares reacquired..................... (1,213,010) (14,774,385)
---------- -----------
Net increase in shares outstanding
before conversion................... 71,357 925,100
Shares issued upon conversion from
Class B............................. 77,566 935,576
---------- -----------
Net increase in shares outstanding.... 148,923 $ 1,860,676
---------- -----------
---------- -----------
November 7, 1996* through
September 30, 1997:
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
- --------------------------------------
Year ended September 30, 1998:
Shares sold........................... 2,383,930 $29,462,184
Shares issued in reinvestment of
dividends and distributions......... 369,244 4,332,243
Shares reacquired..................... (1,750,224) (21,297,211)
---------- -----------
Net increase in shares outstanding
before conversion................... 1,002,950 12,497,216
Shares reacquired upon conversion from
Class A............................. (77,755) (935,576)
---------- -----------
Net increase in shares outstanding.... 925,195 $11,561,640
========== ===========
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B-83
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Notes to Financial Statements
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Class B Shares Amount
- ------- ---------- -----------
November 7, 1996* through
September 30, 1997:
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
- -------
Year ended September 30, 1998:
Shares sold........................... 217,879 $ 2,701,940
Shares issued in reinvestment of
dividends and distributions......... 31,625 371,055
Shares reacquired..................... (152,419) (1,873,645)
---------- -----------
Net increase in shares outstanding.... 97,085 $ 1,199,350
========== ===========
November 7, 1996* through
September 30, 1997:
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
- -------
Year ended September 30, 1998:
Shares sold........................... 309,216 $ 3,901,563
Shares issued in reinvestment of
dividends
and distributions................... 4,713 55,960
Shares reacquired..................... (194,189) (2,438,297)
---------- -----------
Net increase in shares outstanding.... 119,740 $ 1,519,226
========== ===========
November 7, 1996* through
September 30, 1997:
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
========== ===========
- ---------------
* Commencement of investment operations.
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B-84
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Financial Highlights
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<TABLE>
<CAPTION>
Class A
--------------------------------------
<S> <C> <C>
November 7, 1996(a)
Year Ended Through
September 30, September 30,
1998 1997
------------- --------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period...................................... $ 12.89 $ 10.00
------ ------
Income from investment operations
Net investment income..................................................... .15 .09
Net realized and unrealized gain (loss) on investment transactions........ (1.32) 2.87
------ ------
Total from investment operations....................................... (1.17) 2.96
------ ------
Less distributions
Dividends from net investment income...................................... (.12) (.07)
Distributions from net realized gains..................................... (.62) --
------ ------
Total distributions.................................................... (.74) (.07)
------ ------
Net asset value, end of period............................................ $ 10.98 $ 12.89
------ ------
------ ------
TOTAL RETURN(c)........................................................... (9.40)% 29.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................................... $31,339 $ 34,846
Average net assets (000).................................................. $35,145 $ 27,008
Ratios to average net assets:
Expenses, including distribution fees.................................. 1.31% 1.58%(b)
Expenses, excluding distribution fees.................................. 1.06% 1.33%(b)
Net investment income.................................................. 1.20% .90%(b)
Portfolio turnover rate................................................... 99% 55%
<CAPTION>
Class B
-------------------------------------
<S> <C> <C>
November 7, 1996(a)
Year Ended Through
September 30, September 30,
1998 1997
------------- -------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period...................................... $ 12.86 $ 10.00
------ ------
Income from investment operations
Net investment income..................................................... .06 .02
Net realized and unrealized gain (loss) on investment transactions........ (1.31) 2.86
------ ------
Total from investment operations....................................... (1.25) 2.88
------ ------
Less distributions
Dividends from net investment income...................................... (.03) (.02)
Distributions from net realized gains..................................... (.62) --
------ ------
Total distributions.................................................... (.65) (.02)
------ ------
Net asset value, end of period............................................ $ 10.96 $ 12.86
------ ------
------ ------
TOTAL RETURN(c)........................................................... (10.01)% 28.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................................... $84,751 $87,558
Average net assets (000).................................................. $93,465 $62,575
Ratios to average net assets:
Expenses, including distribution fees.................................. 2.06% 2.33%(b)
Expenses, excluding distribution fees.................................. 1.06% 1.33%(b)
Net investment income.................................................. .46% .15%(b)
Portfolio turnover rate................................................... 99% 55%
</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-85
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
--------------------------------------
<S> <C> <C>
November 7, 1996(a)
Year Ended Through
September 30, September 30,
1998 1997
------------- --------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period...................................... $ 12.86 $10.00
----- -----
Income from investment operations
Net investment income..................................................... .06 .02
Net realized and unrealized gain (loss) on investment transactions........ (1.31) 2.86
----- -----
Total from investment operations....................................... (1.25) 2.88
----- -----
Less distributions
Dividends from net investment income...................................... (.03) (.02)
Distributions from net realized gains..................................... (.62) --
----- -----
Total distributions.................................................... (.65) (.02)
----- -----
Net asset value, end of period............................................ $ 10.96 $12.86
----- -----
----- -----
TOTAL RETURN(c)........................................................... (10.01)% 28.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................................... $ 7,124 $7,111
Average net assets (000).................................................. $ 7,734 $5,631
Ratios to average net assets:
Expenses, including distribution fees.................................. 2.06% 2.33%(b)
Expenses, excluding distribution fees.................................. 1.06% 1.33%(b)
Net investment income.................................................. .46% .15%(b)
Portfolio turnover rate................................................... 99% 55%
<CAPTION>
Class Z
-------------------------------------
<S> <C> <C>
November 7, 1996(a)
Year Ended Through
September 30, September 30,
1998 1997
------------- -------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period...................................... $ 12.93 $ 10.00
----- -----
Income from investment operations
Net investment income..................................................... .17 .10
Net realized and unrealized gain (loss) on investment transactions........ (1.33) 2.92
----- -----
Total from investment operations....................................... (1.16) 3.02
----- -----
Less distributions
Dividends from net investment income...................................... (.15) (.09)
Distributions from net realized gains..................................... (.62) --
----- -----
Total distributions.................................................... (.77) (.09)
----- -----
Net asset value, end of period............................................ $ 11.00 $ 12.93
----- -----
----- -----
TOTAL RETURN(c)........................................................... (9.31)% 30.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................................... $ 1,836 $ 609
Average net assets (000).................................................. $ 1,374 $ 227
Ratios to average net assets:
Expenses, including distribution fees.................................. 1.06% 1.33%(b)
Expenses, excluding distribution fees.................................. 1.06% 1.33%(b)
Net investment income.................................................. 1.54% 1.15%(b)
Portfolio turnover rate................................................... 99% 55%
</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-86
<PAGE>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH & INCOME FUND
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
The Prudential Investment Portfolios, 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 The Prudential Investment
Portfolios, Inc., Prudential Jennison Growth & Income Fund (the 'Fund', one of
the portfolios constituting The Prudential Investment Portfolios, Inc.) at
September 30, 1998, the results of its operations for the year then ended, and
the changes in its net assets and the financial highlights for each of the two
years in the period 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 audits. We conducted our audits 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 audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
- --------------------------------------------------------------------------------
B-87
<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-1 repayment
ability will often be evidenced by many of the following characteristics:
. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
A-1
<PAGE>
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC AND CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major 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 designation 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.
A-2
<PAGE>
Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
SHORT-TERM DEBT RATINGS
DUFF 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
DUFF 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
A-3
<PAGE>
APPENDIX I--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.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility which,
for a mutual fund, depicts how widely the returns varied over a certain period
of time. When a fund has a high standard deviation, its range of performance
has been very wide, implying greater volatility potential. Standard deviation
is only one of several measures of a fund's volatility.
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.
HISTORICAL PERFORMANCE DATA
[LINE GRAPH APPEARS HERE]
Value of $1.00 invested on 1/1/26 through 12/31/97
Small Stocks -- $5,519,97 Long-Term Bonds -- $39.07
Common Stocks -- $1,828.33 Treasury Bills -- $14.25
Inflation -- $ 9.02
Source: Stocks, Bonds, Bills and Inflation 1998 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 1997. 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.
<TABLE>
<CAPTION>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------
<S> <C> <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% 9.6%
- ------------------------------------------------------------------------------------------
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% 9.5%
- ------------------------------------------------------------------------------------------
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% 10.2%
- ------------------------------------------------------------------------------------------
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% 12.8%
- ------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS/5/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% -4.3%
- ------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURNS PERCENT 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1%
</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 made in the stocks representing
December 31, 1986 through the S&P 500 stock index with and
December 31, 1997. It does not without reinvested dividends.
represent the performance of any
Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF
MAJOR WORLD STOCK MARKETS
(12/31/86-12/31/97) (IN U.S. DOLLARS)
Netherlands 20.5%
Spain 20.4%
Sweden 20.4%
Hong Kong 19.7%
Belgium 19.5%
Switzerland 17.9% [LINE GRAPH APPEARS HERE]
USA 17.1%
UK 16.6% Capital Appreciation and
France 15.6% Reinvesting Dividends -- $304,596
Germany 12.1% Capital Appreciation only -- $105,413
Austria 9.6%
Japan 6.6%
Source: Morgan Stanley Capital Source: Stocks, Bonds, Bills,
International (MSCI) and Lipper and Inflation 1998 Yearbook,
Analytical Services, Inc. as of Ibbotson Associates, Chicago
12/31/97. Used with permission. (annually updates work by Roger
Morgan Stanley Country indices G. Ibbotson and Rex A.
are unmanaged indices which Sinquefield). Used with
include those stocks making up permission. All rights reserved.
the largest two-thirds of each This chart is used for
country's total stock market illustrative purposes only and
capitalization. Returns reflect is not intended to represent the
the reinvestment of all past, present or future
distributions. This chart is for performance of any Prudential
illustrative purposes only and Mutual Fund. Common stock total
is not indicative of the past, return is based on the Standard
present or future performance of & Poor's 500 Stock Index, a
any specific investment. market-value-weighted index made
Investors cannot invest directly up of 500 of the largest stocks
in stock indices. in the U.S. based upon their
stock market value. Investors
cannot invest directly in
indices.
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL--$12.5 TRILLION
U.S. 49.8%
Europe 32.1%
Pacific Basin 15.6%
Canada 2.5%
Source: Morgan Stanley Capital
International, December 31, 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.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[LINE GRAPH APPEARS HERE]
- -------
Source: Stocks, Bonds, Bills, and Inflation 1998 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 1926-1997.
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>
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 of Growth Fund and Growth & Income Fund and "How the Fund is
Managed--Manager" in Active Balanced Fund's 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, 1997 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, 1997. 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
79,000 persons worldwide, and maintains a sales force of approximately 10,100
agents and nearly 6,500 domestic and international 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 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has
25 million life insurance policies in force today with a face value of almost
$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 1.5 million cars and insures more than 1.2 million
homes.
Money Management. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in
assets under management. Prudential Investments, a business group of The
Prudential, (of which Prudential Mutual Funds is a key part) manages over $211
billion in assets of institutions and individuals. In Pensions & Investments,
May 12, 1997, 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 and more than 1,100 offices throughout the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $4 billion in assets and serves
nearly 1.5 million customers across 50 states.
- -------
/1/PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to The Prudential Investment Portfolios, Inc. and Mercator Asset
Management LP as the subadviser to International Stock Series, a portfolio of
Prudential World 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 December 31, 1997, Prudential Investments Fund Management is the 18th
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 monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase./3/ Non-investment grade bonds,
also known as junk bonds or high yield bonds, are subject to a greater risk of
loss of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
Mutual Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
- -------
/3/As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
III-2
<PAGE>
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 LLC, 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 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1997, assets held by Prudential Securities for
its clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at Prudential Securities./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.
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Three Prudential Securities' analysts were ranked as first-team finishers./8/
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect SM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- -------
/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 Investments, a business group 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, 1997.
/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>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements:
(1) Financial statements included in the Prospectuses constituting Part
A of this Registration Statement:
Financial Highlights.
(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments as of September 30, 1998.
Statement of Assets and Liabilities as of September 30, 1998.
Statement of Operations for the period ended September 30, 1998.
Statements of Changes in Net Assets for the two years ended September
30, 1998 and 1997.
Notes to Financial Statements.
Financial Highlights for the periods ended September 30, 1998.
Report of Independent Accountants.
(b) Exhibits:
(1) (a) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 1(c) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-61997) filed via
EDGAR on February 14, 1996.
(b) Articles Supplementary, incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 4 to the Registration Statement on
Form N-1A (File No. 33-61997) filed via EDGAR on December 6, 1996.
(c) Amendment of Articles of Incorporation, incorporated by reference
to Exhibit 1(c) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
December 6, 1996.
(d) Articles Supplementary, incorporated by reference to Exhibit 1(d)
to the Registration Statement on Form N-14 (File No. 333-38087) filed
via EDGAR on October 17, 1997.
(e) Articles of Amendment, incorporated by reference to Exhibit 1(e)
to Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A (File No. 33-61997) filed via EDGAR on June 11, 1998.
(f) Articles Supplementary.*
(2) By-Laws, incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on August
22, 1995.
(3) Not Applicable.
C-1
<PAGE>
(4) Instruments defining rights of shareholders, incorporated by
reference to Exhibit 4 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on August 22, 1995.
(5) (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 33-61997) filed via EDGAR on February 14,
1996.
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and Jennison Associates Capital Corp., incorporated by reference
to Exhibit 5(b) to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
February 14, 1996.
(c) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC with respect to Prudential Active
Balanced Fund.*
(d) Subadvisory Agreement between the Registrant and The Prudential
Investment Corporation with respect to Prudential Active Balanced
Fund.*
(6) (a) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.*
(b) Form of Selected Dealer Agreement, incorporated by reference to
Exhibit 6(d) to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
June 11, 1998.
(7) Not Applicable.
(8) Custodian Contract between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 9 to the
Registration Statement on Form N-14 (File No. 333-6755) filed via
EDGAR on June 25, 1996.
(9) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 13(a) to the Registration Statement on Form N-14 (File No.
333-6755) filed via EDGAR on June 25, 1996.
(10) Opinion of Shereff, Friedman, Hoffman & Goodman, LLP., incorporated
by reference to Exhibit 10 to the Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No. 33-61997) filed
via EDGAR on September 19, 1995.
(11) Consent of Independent Accountants.*
(12) Not Applicable.
(13) Purchase Agreement, incorporated by reference to Exhibit 13 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-61997) filed via EDGAR on February 14, 1996.
(14) Not Applicable.
(15) (a) Amended and Restated Distribution and Service Plan for Class A
Shares, incorporated by reference to Exhibit 15(a) to Post-
Effective Amendment No. 8 to the Registration Statement on Form N-
1A (File No. 33-61997) filed via EDGAR on June 11, 1998.
(b) Amended and Restated Distribution and Service Plan for Class B
Shares, incorporated by reference to Exhibit 15(b) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A (File No.
33-61997) filed via EDGAR on June 11, 1998.
(c) Amended and Restated Distribution and Service Plan for Class C
Shares, incorporated by reference to Exhibit 15(c) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A (File No.
33-61997) filed via EDGAR on June 11, 1998.
C-2
<PAGE>
(16) (a) Schedule of Computation of Performance Quotations for
Prudential Jennison Growth Fund, incorporated by reference to
Exhibit 16 to Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on April
15, 1996.
(b) Schedule of Computation of Performance Quotations for Prudential
Jennison Growth & Income Fund, incorporated by reference to Exhibit
16(b) to Post-Effective Amendment No. 5 to the Registration Statement
on Form N-1A (File No. 33-61997) filed via EDGAR on April 30, 1997.
(17) Financial Data Schedules.*
(18) Amended and Restated Rule 18f-3 Plan.*
- -------
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of November 13, 1998, there were 60,249, 116,159, 7,614 and 8,660 record
holders of Class A, Class B, Class C and Class Z common stock, respectively,
of Prudential Jennison Growth Fund. As of November 13, 1998, there were 3,984,
11,754, 1,024 and 192 record holders of Class A, Class B, Class C and Class Z
common stock, respectively, of Prudential Jennison Growth & Income Fund. As of
November 13, 1998, there were 664, 830, 113 and 16 record holders of Class A,
Class B, Class C and Class Z common stock, respectively, of Prudential Active
Balanced Fund.
ITEM 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended, (the 1940 Act) and pursuant to Article VI of the Company's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any
shareholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 2-418 of the Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit 6 to the Registration Statement), each Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
C-3
<PAGE>
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of each Management Agreement (Exhibits 5(a) and (c) to the
Registration Statement) and Section 4 of each Subadvisory Agreement (Exhibits
5(b) and (d) to the Registration Statement) limit the liability of Prudential
Investments Fund Management LLC (PIFM), Jennison Associates LLC (Jennison) and
The Prudential Investment Corporation, respectively, to liabilities arising
from willful misfeasance, bad faith or gross negligence in the performance of
their respective duties or from reckless disregard by them of their respective
obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Section 17(h) and (i) of
such Act remain in effect and are consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either
the Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office.
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange
Commission staff's position on Section 17(h) advances will be limited in the
following respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including cost
connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the amount
to which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance; and
(4) Such surety bond or other insurance must be paid for by the recipient of
such advance.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC (PIFM)
See "How the Funds are Managed--Manager" and "How the Fund is Managed--
Manager" in the Prospectuses constituting Part A of this Registration
Statement and "Manager and Subadvisers" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
C-4
<PAGE>
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<C> <C> <S>
Frank W. Giordano Executive Vice Senior Vice President, Prudential
President, Securities Incorporated; Executive
Secretary and Vice President, Secretary and General
General Counsel Counsel, PIFM
Robert F. Gunia Executive Vice Vice President, Prudential; Executive
President and Vice President and Treasurer, PIFM;
Treasurer Senior Vice President, Prudential
Securities Incorporated
Neil A. McGuinness Executive Vice Executive Vice President and Director
President of Marketing, Prudential Mutual Funds
& Annuities PMF&A; Executive Vice
President, PIFM
Brian Storms Officer-In-Charge, President, Prudential Investments;
President, Chief Officer-In-Charge, President, Chief
Executive Officer Executive Officer and Chief Operating
and Chief Operating Officer, PIFM
Officer
</TABLE>
<TABLE>
<S> <C> <C>
Robert J. Sullivan Executive Vice Executive Vice President, PMF&A; Executive Vice President, PIFM
President
</TABLE>
(b) Jennison Associates LLC.
See "How the Funds are Managed--Subadviser" and "How the Fund is Managed--
Subadviser" in the Prospectuses constituting Part A of this Registration
Statement and "Manager and Subadvisers" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of Jennison directors and executive
officers are listed in its Form ADV as currently on file with the Securities
and Exchange Commission (File No. 801-5608), the text of which is hereby
incorporated by reference.
(c) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Subadviser" in the Prospectus of Prudential
Active Balanced Fund constituting Part A of this Registration Statement and
"Manager and Subadvisers" in the Statement of Additional Information
constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza,
Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<C> <C> <S>
E. Michael Caulfield Chief Executive Officer,
Chairman of the Board, Prudential Investments
President and Chief (PIC) of The Prudential
Executive Officer and Insurance Company of
Director America (Prudential)
John R. Strangfeld, Jr. Vice President and Director President of Private Asset
Management Group of
Prudential; Senior Vice
President, Prudential;
Vice President and
Director, PIC
</TABLE>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Money Fund, Command
Government Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc.,
Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Diversified Funds, Prudential Emerging Growth Fund,
Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential
Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential
Global Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential High Yield Total Return Fund, Inc., Prudential Index Series Fund,
Prudential Institutional Liquidity Portfolio, Inc., Prudential Intermediate
Global Income Fund, Inc., Prudential International Bond Fund, Inc., The
Prudential Investment Portfolios, Inc., Prudential Mid-Cap Value Fund,
Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc.,
Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Real Estate Securities Fund, Prudential Small-Cap Quantum Fund, Inc.,
Prudential Small Company Value Fund, Inc., Prudential Special Money Market
Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential 20/20 Focus
Fund, Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The
Target Portfolio Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME/1/ UNDERWRITER REGISTRANT
- ------- ------------- ----------------------
<S> <C> <C>
E. Michael Caulfield... President None
C. Edward Chaplin...... Treasurer None
Mark R. Fetting........ Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
Jean D. Hamilton....... Executive Vice President None
Ronald P. Joelson...... Executive Vice President None
Mario A. Mosse......... Senior Vice President and Chief Operating Officer None
Brian M. Storms........ Executive Vice President President and Director
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
John R. Strangfeld,
Jr. .................. Executive Vice President None
Scott S. Wallner....... Vice President, Secretary and Chief Legal Officer None
Michael G. Williamson.. Vice President, Comptroller and Chief Financial Officer None
</TABLE>
- -------
/1/The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise noted.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-6
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, Jennison Associates LLC, 466 Lexington Avenue, New York,
N.Y. 10017, the Registrant, Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077 and Prudential Mutual Fund Services LLC, Raritan
Plaza One, Edison, New Jersey. Documents required by Rules 31a-1(b)(5), (6),
(7), (9), (10) and (11), 31a-1(f) and Rules 31a-1(b)(4) and (11) and 31a-1(d)
will be kept at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077 and the remaining accounts, books and other documents required by
such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Funds are Managed--
Manager," "How the Funds are Managed--Subadvisers" and "How the Funds are
Managed--Distributor" in the Prospectus and the captions "Manager and
Subadvisers" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Post-Effective Amendment to
the Registration Statement, Registrant is not a party to any management-
related service contract.
ITEM 32. UNDERTAKINGS.
Registrant makes the following undertaking:
To furnish each person to whom a Prospectus is delivered with a copy of
Registrant's latest annual report to shareholders upon request and without
charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act and
has duly caused this Post-Effective Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and State of New Jersey, on the 25th day of November, 1998.
THE PRUDENTIAL INVESTMENT PORTFOLIOS,
INC.
/s/ Brian M. Storms
By______________________________________
BRIAN M. STORMS
PRESIDENT
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C>
SIGNATURE TITLE
DATE
/s / Grace C. Torres Treasurer and November 25,
- ----------------------------------- Principal 1998
GRACE C. TORRES Financial and
Accounting
Officer
/s/ Edward D. Beach Director November 25,
- ----------------------------------- 1998
EDWARD D. BEACH
/s/ Delayne Dedrick Gold Director November 25,
- ----------------------------------- 1998
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Director November 25,
- ----------------------------------- 1998
ROBERT F. GUNIA
/s/ Douglas McCorkindale Director November 25,
- ----------------------------------- 1998
DOUGLAS MCCORKINDALE
/s/ Mendel A. Melzer Director November 25,
- ----------------------------------- 1998
MENDEL A. MELZER
/s/ Thomas T. Mooney Director November 25,
- ----------------------------------- 1998
THOMAS T. MOONEY
</TABLE>
C-8
<PAGE>
SIGNATURES TITLE DATE
/s/ Stephen P. Munn Director
- ------------------------------------ November 25,
STEPHEN P. MUNN 1998
/s/ Richard A. Redeker
- ------------------------------------ Director November 25,
RICHARD A. REDEKER 1998
/s/ Robin B. Smith Director
- ------------------------------------ November 25,
ROBIN B. SMITH 1998
/s/ Brian M. Storms President and November 25,
- ------------------------------------ Director 1998
BRIAN M. STORMS
/s/ Louis A. Weil, III Director
- ------------------------------------ November 25,
LOUIS A. WEIL, III 1998
/s/ Clay T. Whitehead Director
- ------------------------------------ November 25,
CLAY T. WHITEHEAD 1998
C-9
<PAGE>
EXHIBIT INDEX
(1) (a) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 1(c) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-61997) filed via EDGAR
on February 14, 1996.
(b) Articles Supplementary, incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on December 6, 1996.
(c) Amendment of Articles of Incorporation, incorporated by reference to
Exhibit 1(c) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on December 6,
1996.
(d) Articles Supplementary, incorporated by reference to Exhibit 1(d) to
the Registration Statement on Form N-14 (File No. 333-38087) filed via
EDGAR on October 17, 1997.
(e) Articles of Amendment, incorporated by reference to Exhibit 1(e) to
Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on June 11, 1998.
(f) Articles Supplementary.*
(2) By-Laws, incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 33-61997) filed on August 22, 1995.
(3) Not Applicable.
(4) Instruments defining rights of shareholders, incorporated by reference to
Exhibit 4 to the Registration Statement on Form N-1A (File No. 33-61997)
filed on August 22, 1995.
(5) (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc., incorporated by reference to Exhibit 5(a) to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on February 14, 1996.
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and Jennison Associates LLC, formerly Jennison Associates Capital Corp.,
incorporated by reference to Exhibit 5(b) to the Registration Statement on
Form N-1A (File No. 33-61997) filed via EDGAR on February 14, 1996.
(c) Management Agreement between the Registrant and Prudential Investments
Fund Management LLC with respect to Prudential Jennison Active Balanced
Fund, incorporated by reference to Exhibit 5(c) to Post-Effective Amendment
No. 8 to the Registration Statement on Form N-1A (File No. 33-61997) filed
via EDGAR on June 11, 1998.
(d) Subadvisory Agreement between the Registrant and The Prudential
Investment Corporation with respect to Prudential Active Balanced Fund,
incorporated by reference to Exhibit 5(d) to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A (File No. 33-61997) filed via
EDGAR on June 11, 1998.
(6) (a) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.*
(b) Form of Selected Dealer Agreement, incorporated by reference to Exhibit
6(d) to Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A (File No. 33-61997) filed via EDGAR on June 11, 1998.
<PAGE>
(7) Not Applicable.
(8) Custodian Contract between the Registrant and State Street Bank and Trust
Company, incorporated by reference to Exhibit 9 to the Registration
Statement on Form N-14 (File No. 333-6755) filed via EDGAR on June 25,
1996.
(9) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 13(a) to the Registration Statement on Form N-14 (File No. 333-
6755) filed via EDGAR on June 25, 1996.
(10) Opinion of Shereff, Friedman, Hoffman & Goodman, LLP., incorporated by
reference to Exhibit 10 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-61997) filed via EDGAR
on September 19, 1995.
(11) Consent of Independent Accountants.*
(12) Not Applicable.
(13) Purchase Agreement, incorporated by reference to Exhibit 13 to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on February 14, 1996.
(14) Not Applicable.
(15) (a) Amended and Restated Distribution and Service Plan for Class A
Shares, incorporated by reference to Exhibit 15(a) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A (File No. 33-
61997) filed via EDGAR on June 11, 1998.
(b) Amended and Restated Distribution and Service Plan for Class B Shares,
incorporated by reference to Exhibit 15(b) to Post-Effective Amendment No.
8 to the Registration Statement on Form N-1A (File No. 33-61997) filed via
EDGAR on June 11, 1998.
(c) Amended and Restated Distribution and Service Plan for Class C Shares,
incorporated by reference to Exhibit 15(c) to Post-Effective Amendment No.
8 to the Registration Statement on Form N-1A (File No. 33-61997) filed via
EDGAR on June 11, 1998.
(16) (a) Schedule of Computation of Performance Quotations for Prudential
Jennison Growth Fund, incorporated by reference to Exhibit 16 to Post-
Effective Amendment No. 2 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on April 15, 1996.
(b) Schedule of Computation of Performance Quotations for Prudential
Jennison Growth & Income Fund, incorporated by reference to Exhibit 16(b)
to Post-Effective Amendment No. 5 to the Registration Statement on Form N-
1A (File No. 33-61997) filed via EDGAR on April 30, 1997.
(17) Financial Data Schedules.*
(18) Amended and Restated Rule 18f-3 Plan.*
- -------------------------------------------------------------------------------
* Filed herewith
<PAGE>
EXHIBIT 99.B1(f)
ARTICLES SUPPLEMENTARY
of
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
The Prudential Investment Portfolios, Inc., a Maryland corporation having
its principal office in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: In accordance with Article IV of the Charter of the Corporation and
the Maryland General Corporation Law, the Board of Directors has reclassified
the unissued shares of its Class C Common Stock (par value $.001 per share) by
changing certain terms and conditions as follows:
Effective November 2, 1998, all newly-issued Class C Shares of Common Stock
shall be subject to a front-end sales charge, a contingent deferred sales
charge, and a Rule 12b-1 distribution fee as determined by the Board of
Directors from time to time in accordance with the Investment Company Act of
1940, as amended, and as disclosed in the current prospectus for such shares.
IN WITNESS WHEREOF, The Prudential Investment Portfolios, Inc. has caused
these presents to be signed in its name and on its behalf by its Vice President
and witnessed by its Assistant Secretary on October 30, 1998.
WITNESS: THE PRUDENTIAL INVESTMENT
PORTFOLIOS, INC.
Marguerite E. H. Morrison By: /s/ Robert F. Gunia
- ------------------------------ --------------------------------
Marguerite E. H. Morrison, Robert F. Gunia, Vice President
Assistant Secretary
THE UNDERSIGNED, Vice President of The Prudential Investment
Portfolios, Inc., who executed on behalf of the Corporation Articles
Supplementary of which this Certificate is made a part, hereby acknowledges in
the name and on behalf of said Corporation the foregoing Articles Supplementary
to be in the corporate act of said Corporation and hereby certifies that the
matters and facts set forth herein with respect to the authorization and
approval thereof are true in all material respects under the penalties of
perjury.
By: /s/ Robert F. Gunia
--------------------------------
Robert F. Gunia, Vice President
<PAGE>
EXHIBIT 99.B6(a)
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Distribution Agreement
----------------------
Agreement made as of June 1, 1998, between The Prudential Investment
Portfolios, Inc. (the Fund), and Prudential Investment Management Services LLC,
a Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor hereby accepts such appointment and agrees to
act hereunder. The Fund hereby agrees during the term of this Agreement to sell
Shares of the Fund through the Distributor on the terms and conditions set forth
below.
<PAGE>
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the
Fund to act as principal underwriter and distributor of the Fund's Shares,
except that:
2.1 The exclusive rights granted to the Distributor to sell
Shares of the Fund shall not apply to Shares of the Fund issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of all
(or substantially all) the assets or the outstanding shares of any such company
by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Fund's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement filed by the
Fund with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
--------------------------------
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the
Fund and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or
all classes and/or series of its Shares at times when redemption is suspended
pursuant to
2
<PAGE>
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by
the Fund, shall be promptly advised of all purchase orders for Shares received
by the Distributor. Any order may be rejected by the Fund; provided, however,
that the Fund will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts for such Shares pursuant to the instructions of the Distributor.
Payment shall be made to the Fund in New York Clearing House funds or federal
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
----------------------------------------------
4.1 Any of the outstanding Shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Shares so tendered
in accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Shares
shall be paid by the Fund as follows: (i) in the case of Shares subject to a
contingent deferred sales charge, any applicable contingent deferred sales
charge shall be paid to the Distributor, and the balance shall be paid to or for
the account of the redeeming shareholder, in each case in accordance with
applicable provisions of the Prospectus; and (ii) in the case of all other
Shares, proceeds shall be paid to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of any class and/or series of Shares or payment
may be suspended at times when the New York Stock Exchange is closed for other
than customary weekends and holidays, when trading on said Exchange is
restricted, when an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange Commission, by order,
so permits.
3
<PAGE>
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as
the Distributor and the Fund may approve of its intention to sell any
appropriate number of its Shares; provided that the Fund shall not be required
to amend its Articles of Incorporation or By-Laws to comply with the laws of any
state, to maintain an office in any state, to change the terms of the offering
of its Shares in any state from the terms set forth in its Registration
Statement, to qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims arising out of
the offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such notifications.
4
<PAGE>
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Shares, but shall not be obligated to sell any specific number
of Shares. Sales of the Shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers as
set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
7.1 With respect to classes and/or series of Shares which impose
a front-end sales charge, the Distributor shall receive and may retain any
portion of any front-end sales charge which is imposed on such sales and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Rule 2830 of the Conduct Rules of the NASD. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose
a contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD.
5
<PAGE>
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
-----------------------------------------
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect,
the Distributor shall inform the Board of the commissions and account servicing
fees with respect to the relevant class and/or series of Shares to be paid by
the Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
----------------------
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
6
<PAGE>
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the
Distributor, its officers and directors and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any reasonable counsel fees incurred in connection therewith)
which the Distributor, its officers, members or any such controlling person may
incur under the Securities Act, or under common law or otherwise, arising out of
or based upon any untrue statement of a material fact contained in the
Registration Statement or Prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information furnished by
the Distributor to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to the benefit
of any such officer, member or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of Directors or Directors who
are neither "interested persons" of the Fund as defined in Section 2(a)(19) of
the Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the
Fund, its officers and Directors and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and Directors or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its
7
<PAGE>
Directors or officers or such controlling person resulting from such claims or
demands shall arise out of or be based upon any alleged untrue statement of a
material fact contained in information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus or shall arise out of or be
based upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus or
necessary to make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and directors and any such controlling
person as aforesaid, is expressly conditioned upon the Distributor's being
promptly notified of any action brought against the Fund, its officers and
Directors or any such controlling person, such notification being given to the
Distributor at its principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of any of the
Fund's Plans or in any agreement related thereto (independent Directors), cast
in person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent Directors or by vote of
a majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when used
in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the independent
Directors cast in person at a meeting called for the purpose of voting on such
amendment.
8
<PAGE>
Section 13. Separate Agreement as to Classes and/or Series
----------------------------------------------
The amendment or termination of this Agreement with respect to
any class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. Governing Law
-------------
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New Jersey as at the
time in effect and the applicable provisions of the Investment Company Act. To
the extent that the applicable law of the State of New Jersey, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
Prudential Investment Management Services LLC
By: /s/ Brian M. Storms
-----------------------------
Brian M. Storms
Executive Vice President
The Prudential Investment Portfolios, Inc.
By: /s/ Robert F. Gunia
-----------------------------
Robert F. Gunia
Vice President
9
<PAGE>
EXHIBIT 99.B11
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 9 to the registration
statement on Form N-1A (the "Registration Statement") of our reports dated
November 20, 1998, relating to the financial statements and financial highlights
of The Prudential Investment Portfolios, Inc. (consisting of Prudential Active
Balanced Fund, Prudential Jennison Growth and Income Fund and Prudential
Jennison Growth Fund) which appear in such statement of Additional Information,
and to the incorporation by reference of our reports into the Prospectuses which
constitute part of this Registration Statement. We also consent to the reference
to us under the heading "Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants" in such Statement of Additional Information and to the
reference to us under the heading "Financial Highlights" in such Prospectuses.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 24, 1998
<PAGE>
EXHIBIT 99.B18
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in each investment
portfolio (each a Portfolio). Any material amendment to this plan is subject to
prior approval of the Board of Directors, including a majority of the
independent Directors.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge
- -------------- and a distribution and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1%
per annum of the average daily net assets of the class. The
initial sales charge is waived or reduced for certain
eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge
- -------------- but are subject to a high contingent deferred sales charge
(declining from 5% to zero over a six-year period) which
will be imposed on certain redemptions and a Rule 12b-1 fee
not to exceed 1% per annum of the average daily net assets
of the class. The contingent deferred sales charge is waived
for certain eligible investors. Class B shares automatically
convert to Class A shares approximately seven years after
purchase.
CLASS C SHARES: Class C shares issued before November 2, 1998 are not
- -------------- subject to an initial sales charge but are subject to a 1%
contingent deferred sales charge which will be imposed on
certain redemptions within the first 12 month after purchase
and a Rule 12b-1 fee not to exceed 1% per annum of the
average daily net assets of the class. Class C shares issued
on or after November 2, 1998 are subject to a low initial
sales charge and a 1% contingent deferred sales charge which
will be imposed on certain redemptions within the first 18
months after purchase and a Rule 12b-1 fee not to exceed 1%
per annum of the average daily net assets of the class.
<PAGE>
Class Z SHARES: Class Z shares are not subject to either an initial or
- -------------- contingent deferred sales charge, nor are they subject to
any Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class of a Portfolio will be allocated to
each class of such Portfolio on the basis of the net asset value of that
class in relation to the net asset value of the Portfolio.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by each Portfolio to each class of
shares, to the extent paid, will be paid on the same day and at the same
time, and will be determined in the same manner and will be in the same
amount, except that the amount of the dividends and other distributions
declared and paid by a particular class of the Portfolio may be different
from that paid by another class of the Portfolio because of Rule 12b-1 fees
and other expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund's
current prospectus. Exchange privileges may vary among classes and among
holders of a Class.
CONVERSION FEATURES
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.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the existence of any material conflicts among the interests of its
several classes. The Directors,
2
<PAGE>
including a majority of the independent Directors, shall take such action
as is reasonably necessary to eliminate any such conflicts that may
develop. Prudential Investments Fund Management LLC, the Fund's Manager,
will be responsible for reporting any potential or existing conflicts to
the Directors.
C. For purposes of expressing an opinion on the financial statements of each
Portfolio of the Fund, the methodology and procedures for calculating the
net asset value and dividends/distributions of the Fund's several classes
and the proper allocation of income and expenses among such classes will be
examined annually by the Fund's independent auditors who, in performing
such examination, shall consider the factors set forth in the relevant
auditing standards adopted, from time to time, by the American Institute of
Certified Public Accountants.
Date: August 24, 1995
Amended: June 1, 1998
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL ACTIVE BALANCED FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 194,745,091
<INVESTMENTS-AT-VALUE> 160,197,113
<RECEIVABLES> 26,061,581
<ASSETS-OTHER> 30,429,951
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 216,688,645
<PAYABLE-FOR-SECURITIES> 47,054,176
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,256,602
<TOTAL-LIABILITIES> 48,310,778
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,374,160
<SHARES-COMMON-STOCK> 12,647,292
<SHARES-COMMON-PRIOR> 11,064,552
<ACCUMULATED-NII-CURRENT> 3,863,980
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,567,471
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,427,744)
<NET-ASSETS> 168,377,867
<DIVIDEND-INCOME> 1,481,227
<INTEREST-INCOME> 5,787,656
<OTHER-INCOME> 0
<EXPENSES-NET> 1,877,137
<NET-INVESTMENT-INCOME> 5,391,746
<REALIZED-GAINS-CURRENT> 26,438,362
<APPREC-INCREASE-CURRENT> (28,216,192)
<NET-CHANGE-FROM-OPS> 3,613,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,694,664)
<DISTRIBUTIONS-OF-GAINS> (13,968,891)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105,305,809
<NUMBER-OF-SHARES-REDEEMED> (100,421,933)
<SHARES-REINVESTED> 18,663,277
<NET-CHANGE-IN-ASSETS> 8,497,514
<ACCUMULATED-NII-PRIOR> 3,191,713
<ACCUMULATED-GAINS-PRIOR> 11,080,395
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,176,079
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,877,137
<AVERAGE-NET-ASSETS> 2,081,000
<PER-SHARE-NAV-BEGIN> 14.41
<PER-SHARE-NII> 0.44
<PER-SHARE-GAIN-APPREC> (0.20)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.36)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.29
<EXPENSE-RATIO> 1.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL ACTIVE BALANCED FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 194,745,091
<INVESTMENTS-AT-VALUE> 160,197,113
<RECEIVABLES> 26,061,581
<ASSETS-OTHER> 30,429,951
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 216,688,645
<PAYABLE-FOR-SECURITIES> 47,054,176
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,256,602
<TOTAL-LIABILITIES> 48,310,778
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,374,160
<SHARES-COMMON-STOCK> 12,647,292
<SHARES-COMMON-PRIOR> 11,064,552
<ACCUMULATED-NII-CURRENT> 3,863,980
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,567,471
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,427,744)
<NET-ASSETS> 168,377,867
<DIVIDEND-INCOME> 1,481,227
<INTEREST-INCOME> 5,787,656
<OTHER-INCOME> 0
<EXPENSES-NET> 1,877,137
<NET-INVESTMENT-INCOME> 5,391,746
<REALIZED-GAINS-CURRENT> 26,438,362
<APPREC-INCREASE-CURRENT> (28,216,192)
<NET-CHANGE-FROM-OPS> 3,613,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,694,664)
<DISTRIBUTIONS-OF-GAINS> (13,968,891)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105,305,809
<NUMBER-OF-SHARES-REDEEMED> (100,421,933)
<SHARES-REINVESTED> 18,663,277
<NET-CHANGE-IN-ASSETS> 8,497,514
<ACCUMULATED-NII-PRIOR> 3,191,713
<ACCUMULATED-GAINS-PRIOR> 11,080,395
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,176,079
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,877,137
<AVERAGE-NET-ASSETS> 1,276,000
<PER-SHARE-NAV-BEGIN> 14.34
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> (0.14)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.25)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.22
<EXPENSE-RATIO> 2.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> PRUDENTIAL ACTIVE BALANCED FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 194,745,091
<INVESTMENTS-AT-VALUE> 160,197,113
<RECEIVABLES> 26,061,581
<ASSETS-OTHER> 30,429,951
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 216,688,645
<PAYABLE-FOR-SECURITIES> 47,054,176
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,256,602
<TOTAL-LIABILITIES> 48,310,778
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,374,160
<SHARES-COMMON-STOCK> 12,647,292
<SHARES-COMMON-PRIOR> 11,064,552
<ACCUMULATED-NII-CURRENT> 3,863,980
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,567,471
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,427,744)
<NET-ASSETS> 168,377,867
<DIVIDEND-INCOME> 1,481,227
<INTEREST-INCOME> 5,787,656
<OTHER-INCOME> 0
<EXPENSES-NET> 1,877,137
<NET-INVESTMENT-INCOME> 5,391,746
<REALIZED-GAINS-CURRENT> 26,438,362
<APPREC-INCREASE-CURRENT> (28,216,192)
<NET-CHANGE-FROM-OPS> 3,613,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,694,664)
<DISTRIBUTIONS-OF-GAINS> (13,968,891)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105,305,809
<NUMBER-OF-SHARES-REDEEMED> (100,421,933)
<SHARES-REINVESTED> 18,663,277
<NET-CHANGE-IN-ASSETS> 8,497,514
<ACCUMULATED-NII-PRIOR> 3,191,713
<ACCUMULATED-GAINS-PRIOR> 11,080,395
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,176,079
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,877,137
<AVERAGE-NET-ASSETS> 117,000
<PER-SHARE-NAV-BEGIN> 14.34
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> (0.35)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.25)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.22
<EXPENSE-RATIO> 2.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> PRUDENTIAL ACTIVE BALANCED FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 194,745,091
<INVESTMENTS-AT-VALUE> 160,197,113
<RECEIVABLES> 26,061,581
<ASSETS-OTHER> 30,429,951
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 216,688,645
<PAYABLE-FOR-SECURITIES> 47,054,176
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,256,602
<TOTAL-LIABILITIES> 48,310,778
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,374,160
<SHARES-COMMON-STOCK> 12,647,292
<SHARES-COMMON-PRIOR> 11,064,552
<ACCUMULATED-NII-CURRENT> 3,863,980
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,567,471
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,427,744)
<NET-ASSETS> 168,377,867
<DIVIDEND-INCOME> 1,481,227
<INTEREST-INCOME> 5,787,656
<OTHER-INCOME> 0
<EXPENSES-NET> 1,877,137
<NET-INVESTMENT-INCOME> 5,391,746
<REALIZED-GAINS-CURRENT> 26,438,362
<APPREC-INCREASE-CURRENT> (28,216,192)
<NET-CHANGE-FROM-OPS> 3,613,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,694,664)
<DISTRIBUTIONS-OF-GAINS> (13,968,891)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105,305,809
<NUMBER-OF-SHARES-REDEEMED> (100,421,933)
<SHARES-REINVESTED> 18,663,277
<NET-CHANGE-IN-ASSETS> 8,497,514
<ACCUMULATED-NII-PRIOR> 3,191,713
<ACCUMULATED-GAINS-PRIOR> 11,080,395
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,176,079
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,877,137
<AVERAGE-NET-ASSETS> 176,992,000
<PER-SHARE-NAV-BEGIN> 14.45
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> (0.12)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.39)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.32
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 005
<NAME> PRUDENTIAL JENNISON GROWTH FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 2,024,068,119
<INVESTMENTS-AT-VALUE> 2,222,271,912
<RECEIVABLES> 28,303,960
<ASSETS-OTHER> 117,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 17,275,137
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,930,365
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,924,192,478
<SHARES-COMMON-STOCK> 154,701,805
<SHARES-COMMON-PRIOR> 78,189,708
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 100,091,259
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 198,203,793
<NET-ASSETS> (232,891,513)
<DIVIDEND-INCOME> 11,248,612
<INTEREST-INCOME> 2,241,927
<OTHER-INCOME> 0
<EXPENSES-NET> 20,245,148
<NET-INVESTMENT-INCOME> (6,754,609)
<REALIZED-GAINS-CURRENT> 131,020,013
<APPREC-INCREASE-CURRENT> (190,394,651)
<NET-CHANGE-FROM-OPS> (66,129,247)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (108,687,688)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,822,040,223
<NUMBER-OF-SHARES-REDEEMED> (730,978,040)
<SHARES-REINVESTED> 106,812,422
<NET-CHANGE-IN-ASSETS> 1,023,057,670
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 81,276,520
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,927,436
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 20,245,148
<AVERAGE-NET-ASSETS> 251,118,000
<PER-SHARE-NAV-BEGIN> 15.39
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 0.40
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.31)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.44
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 006
<NAME> PRUDENTIAL JENNISON GROWTH FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 2,024,068,119
<INVESTMENTS-AT-VALUE> 2,222,271,912
<RECEIVABLES> 28,303,960
<ASSETS-OTHER> 117,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 17,275,137
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,930,365
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,924,192,478
<SHARES-COMMON-STOCK> 154,701,805
<SHARES-COMMON-PRIOR> 78,189,708
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 100,091,259
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 198,203,793
<NET-ASSETS> (232,891,513)
<DIVIDEND-INCOME> 11,248,612
<INTEREST-INCOME> 2,241,927
<OTHER-INCOME> 0
<EXPENSES-NET> 20,245,148
<NET-INVESTMENT-INCOME> (6,754,609)
<REALIZED-GAINS-CURRENT> 131,020,013
<APPREC-INCREASE-CURRENT> (190,394,651)
<NET-CHANGE-FROM-OPS> (66,129,247)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (108,687,688)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,822,040,223
<NUMBER-OF-SHARES-REDEEMED> (730,978,040)
<SHARES-REINVESTED> 106,812,422
<NET-CHANGE-IN-ASSETS> 1,023,057,670
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 81,276,520
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,927,436
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 20,245,148
<AVERAGE-NET-ASSETS> 557,823,000
<PER-SHARE-NAV-BEGIN> 15.18
<PER-SHARE-NII> (0.15)
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.31)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.11
<EXPENSE-RATIO> 1.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 007
<NAME> PRUDENTIAL JENNISON GROWTH FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 2,024,068,119
<INVESTMENTS-AT-VALUE> 2,222,271,912
<RECEIVABLES> 28,303,960
<ASSETS-OTHER> 117,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 17,275,137
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,930,365
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,924,192,478
<SHARES-COMMON-STOCK> 154,701,805
<SHARES-COMMON-PRIOR> 78,189,708
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 100,091,259
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 198,203,793
<NET-ASSETS> (232,891,513)
<DIVIDEND-INCOME> 11,248,612
<INTEREST-INCOME> 2,241,927
<OTHER-INCOME> 0
<EXPENSES-NET> 20,245,148
<NET-INVESTMENT-INCOME> (6,754,609)
<REALIZED-GAINS-CURRENT> 131,020,013
<APPREC-INCREASE-CURRENT> (190,394,651)
<NET-CHANGE-FROM-OPS> (66,129,247)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (108,687,688)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,822,040,223
<NUMBER-OF-SHARES-REDEEMED> (730,978,040)
<SHARES-REINVESTED> 106,812,422
<NET-CHANGE-IN-ASSETS> 1,023,057,670
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 81,276,520
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,927,436
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 20,245,148
<AVERAGE-NET-ASSETS> 35,337,000
<PER-SHARE-NAV-BEGIN> 15.18
<PER-SHARE-NII> (0.15)
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.31)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.11
<EXPENSE-RATIO> 1.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 008
<NAME> PRUDENTIAL JENNISON GROWTH FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 2,024,068,119
<INVESTMENTS-AT-VALUE> 2,222,271,912
<RECEIVABLES> 28,303,960
<ASSETS-OTHER> 117,160
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 17,275,137
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,930,365
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,924,192,478
<SHARES-COMMON-STOCK> 154,701,805
<SHARES-COMMON-PRIOR> 78,189,708
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 100,091,259
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 198,203,793
<NET-ASSETS> (232,891,513)
<DIVIDEND-INCOME> 11,248,612
<INTEREST-INCOME> 2,241,927
<OTHER-INCOME> 0
<EXPENSES-NET> 20,245,148
<NET-INVESTMENT-INCOME> (6,754,609)
<REALIZED-GAINS-CURRENT> 131,020,013
<APPREC-INCREASE-CURRENT> (190,394,651)
<NET-CHANGE-FROM-OPS> (66,129,247)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (108,687,688)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,822,040,223
<NUMBER-OF-SHARES-REDEEMED> (730,978,040)
<SHARES-REINVESTED> 106,812,422
<NET-CHANGE-IN-ASSETS> 1,023,057,670
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 81,276,520
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,927,436
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 20,245,148
<AVERAGE-NET-ASSETS> 810,296,000
<PER-SHARE-NAV-BEGIN> 15.45
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.31)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.53
<EXPENSE-RATIO> 0.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 009
<NAME> JENNISON GROWTH & INCOME FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 131,471,466
<INVESTMENTS-AT-VALUE> 124,941,225
<RECEIVABLES> 15,812,406
<ASSETS-OTHER> 25,640
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 1,542,928
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,186,462
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,657,527
<SHARES-COMMON-STOCK> 11,403,866
<SHARES-COMMON-PRIOR> 11,409,476
<ACCUMULATED-NII-CURRENT> 8,913,440
<OVERDISTRIBUTION-NII> 290,719
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,811,805)
<NET-ASSETS> (22,813,342)
<DIVIDEND-INCOME> 2,158,603
<INTEREST-INCOME> 1,314,600
<OTHER-INCOME> 0
<EXPENSES-NET> 2,564,275
<NET-INVESTMENT-INCOME> 908,928
<REALIZED-GAINS-CURRENT> 10,777,238
<APPREC-INCREASE-CURRENT> (25,848,538)
<NET-CHANGE-FROM-OPS> (14,162,372)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (657,733)
<DISTRIBUTIONS-OF-GAINS> (6,394,570)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 49,851,743
<NUMBER-OF-SHARES-REDEEMED> (40,383,538)
<SHARES-REINVESTED> 6,672,687
<NET-CHANGE-IN-ASSETS> (5,073,783)
<ACCUMULATED-NII-PRIOR> 39,524
<ACCUMULATED-GAINS-PRIOR> 4,530,772
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 826,308
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,564,275
<AVERAGE-NET-ASSETS> 31,339,000
<PER-SHARE-NAV-BEGIN> 12.89
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.06)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.98
<EXPENSE-RATIO> 1.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 010
<NAME> JENNISON GROWTH & INCOME FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 131,471,466
<INVESTMENTS-AT-VALUE> 124,941,225
<RECEIVABLES> 15,812,406
<ASSETS-OTHER> 25,640
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 1,542,928
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,186,462
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,657,527
<SHARES-COMMON-STOCK> 11,403,866
<SHARES-COMMON-PRIOR> 11,409,476
<ACCUMULATED-NII-CURRENT> 8,913,440
<OVERDISTRIBUTION-NII> 290,719
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,811,805)
<NET-ASSETS> (22,813,342)
<DIVIDEND-INCOME> 2,158,603
<INTEREST-INCOME> 1,314,600
<OTHER-INCOME> 0
<EXPENSES-NET> 2,564,275
<NET-INVESTMENT-INCOME> 908,928
<REALIZED-GAINS-CURRENT> 10,777,238
<APPREC-INCREASE-CURRENT> (25,848,538)
<NET-CHANGE-FROM-OPS> (14,162,372)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (657,733)
<DISTRIBUTIONS-OF-GAINS> (6,394,570)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 49,851,743
<NUMBER-OF-SHARES-REDEEMED> (40,383,538)
<SHARES-REINVESTED> 6,672,687
<NET-CHANGE-IN-ASSETS> (5,073,783)
<ACCUMULATED-NII-PRIOR> 39,524
<ACCUMULATED-GAINS-PRIOR> 4,530,772
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 826,308
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,564,275
<AVERAGE-NET-ASSETS> 84,751,000
<PER-SHARE-NAV-BEGIN> 12.86
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.96)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.96
<EXPENSE-RATIO> 2.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> JENNISON GROWTH & INCOME FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 131,471,466
<INVESTMENTS-AT-VALUE> 124,941,225
<RECEIVABLES> 15,812,406
<ASSETS-OTHER> 25,640
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 1,542,928
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,186,462
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> JENNISON GROWTH & INCOME FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
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</TABLE>
