-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nfp5yTbniiJmYEVr6oMXTVmmnwYsDyJcC9oQI3AIjXYq6UZKyFPSjOwh16Gb7ytk XnW33OFpPbKemiWIlIB/VA== 0000355348-99-000119.txt : 19990414 0000355348-99-000119.hdr.sgml : 19990414 ACCESSION NUMBER: 0000355348-99-000119 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL DIVERSIFIED FUNDS CENTRAL INDEX KEY: 0001067442 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-08915 FILM NUMBER: 99592216 BUSINESS ADDRESS: STREET 1: GATEWAY CENTER THREE STREET 2: 100 MULBERRY STREET CITY: NEWARK STATE: NJ ZIP: 07102 BUSINESS PHONE: 9733671495 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL DIVERSIFIED SERIES DATE OF NAME CHANGE: 19980803 N-30D 1 PRUDENTIAL DIVERSIFIED FUNDS (ICON) Prudential Diversified FundsSM Prudential Diversified High Growth Fund SEMI ANNUAL REPORT Jan. 31, 1999 (LOGO) Prudential Diversified High Growth Fund Performance At A Glance. The Prudential Diversified High Growth Fund trailed the Lipper Growth Fund Average in part because we target 20% of our assets to foreign stocks which most of our peers do not hold. Foreign stocks trailed U.S. shares over our reporting period. The largest contribution to our return came from our growth stocks while our value stocks trailed the average. Value and growth styles of stock investing diverged in performance, as investors strongly preferred growth companies, particularly large familiar ones. Cumulative Total Returns1 As of 1/31/99
Since Since Inception2 Inception2 (Without Sales Charge) (With Sales Charge) Class A 9.30% 3.84% Class B 9.10 4.10 Class C 9.10 7.01 Class Z 9.40 9.40 Lipper Growth Fund Avg.3 12.41 N/A
Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1 Source: Prudential Investments Fund Management and Lipper, Inc. Since the Fund has been in existence less than one year, no average annual total returns are presented. The Fund charges a maximum front-end sales charge of 5% for Class A shares. Class B shares are subject to a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically convert to Class A shares, on a quarterly basis, approximately seven years after purchase. Class C shares are subject to a front-end sales charge of 1% and a CDSC of 1% for 18 months. Class Z shares are not subject to a sales charge or distribution fee. 2 Inception dates: Class A, B, C, and Z, 11/18/98. 3 The Lipper Since Inception return is for all funds in each share class. Investment Advisers' Report Prudential Investments Fund Management LLC - - John Van Belle, Ph.D. - - Stacie Mintz Sub-Advisers The Dreyfus Corporation Franklin Advisers, Inc. Jennison Associates LLC Lazard Asset Management The Prudential Investment Corporation The Fund seeks to provide long-term capital appreciation. It invests in a diversified portfolio of stocks. There can be no assurance that the Fund will achieve its investment objective. High Growth Fund Diversification Target (GRAPH) Diversification -- spreading your investments over many different securities -- is a basic principle of investing. It helps to reduce the overall risk of your portfolio. Moreover, when we rebalance our portfolio to restore the original weighting of different asset and style classes, the discipline forces us to sell high and buy low. Over time, this may improve your return. What Is Diversification? Diversification -- This is how diversification works: Mutual funds not only provide professional money management, they also allow a relatively small investment to be spread over many different securities. When you own a large number of different securities, the impact of any one on your return is reduced. In addition, if you diversify your investments among asset classes and investment styles -- between domestic and foreign stocks, among stocks of companies with different market capitalizations, and between value and growth stocks -- it is less likely that all the securities you own will move in the same direction at one time. The Prudential Diversified Funds provide more of this buffering than a fund investing in only one asset class. We believe this will result in smoother returns over time. Rebalancing -- The Diversified High Growth Fund has a target balance of the various asset classes. As some perform better than others, the portfolio will drift from this original balance: the securities that rise most will become a larger proportion of the invested assets. We direct new investments to the asset classes that have fallen below their target ratio and, when necessary, sell appreciated securities to maintain the balance. This not only keeps your risk exposure from changing too much, but it may reduce the average cost of our investments and increase our average selling price over time. Although an individual investor can diversify and rebalance, it would require a large investment to own the range of asset classes represented in the Prudential Diversified High Growth Fund. Moreover, calculating the amounts to allocate to each kind of security in a rebalancing would be difficult. Prudential Diversified Funds do it all for you. Asset classes are classifications of investments. The most basic distinction among securities is among stocks, bonds, and money market investments. Stocks are shares of ownership in a firm. Owners share in the profits, after debts are paid, and share in the firm's appreciation in value. Generally, the prices of stocks vary with investors' estimates of a firm's earning prospects, including the impact of broader economic conditions. Historically, they have been more volatile than the prices of bonds or money market instruments, but have greater long-term returns. To provide greater control over diversification, stocks are often subdivided into more homogeneous classes by geography, company size, or economic sector. Bonds are loans to a company, government, or agency. They carry a fixed interest rate or one that varies according to a rule that is specified in the bond. They have a maturity date at which they must be repaid. Generally, bond prices vary with current interest rates for new bonds and with changes in the debtor's prospects of repaying the loan. Money market instruments are very short-term loans, 13 months or less. Bonds and money market instruments are called fixed-income securities. The Economic Context. - ------------------------------------------------- At the time we opened the Prudential Diversified Funds in November 1998, global financial markets had been unsettled first by an economic recession in Asia and then by debt defaults in Russia and China. Both stock and bond prices had fallen sharply, except for United States Treasury bonds, which increased in price as investors tried to avoid any risk at all. In response to the turmoil, European central banks reduced interest rates to reassure investors about European economic growth and the U.S. Federal Reserve Bank made the dramatic move of reducing rates three times within a two-month period. (Lower interest rates are expected to stimulate economic activity.) U.S. stock markets began to climb again in October, rebounding from their earlier fall. However, as the economy heats up, interest rates normally rise again as demand for credit increases. This was the setting for our initial investments in mid-November. Early in 1999, it became clearer that the U.S. economy was growing rapidly, but concerns about economies elsewhere continued. Brazil devalued its currency -- raising the prices of all imported goods for Brazilians -- and slipped into a recession that threatened to spread to its Latin American trading partners. There were signs of economic stabilization in Asia. Japan's economy has been contracting, despite the Japanese government's announcements of steps to reform and revive its economy. The Financial Markets. - ------------------------------------------------- Investors continued to feel insecure despite the market bounce, so stock advances in the United States were focused on the very largest growth companies. A standard benchmark for U.S. large-cap stocks is the S&P 500 Index. The S&P 500 rose 12% during our reporting period -- November 18, 1998 through the end of January 1999 -- while the stocks of smaller companies rose only 9% (measured by the Russell 2000 Small-Cap Index). Growth & Value. Growth-style stocks also were significantly favored over value stocks in all market-cap sectors. In the large caps, growth stocks returned 16%, while value returned only 8%. Among small caps, the difference was even more marked. These differences were generally due to the strong performance of a few of the larger growth-style stocks, while most other stocks languished. The concentration of performance Continued... United States Treasury bonds are backed by the full faith and credit of the U.S. government, so investors view them as among the safest investments. Because of their safety, they generally carry a lower yield than corporate or foreign government bonds. When investors are more fearful, the demand for these safest of all securities increases and their price rises, while other bonds generally fall in value. A decline in value makes the bond's fixed interest payments amount to a higher yield on its purchase price. A currency devaluation is a decline in purchasing power compared to currencies of other countries. One way that can happen is if a country that has been maintaining some control over its exchange rate, such as Brazil, changes its policy. The result is a sharp increase in inflation for the Brazilian people and a loss of purchasing power. Moreover, Brazilian borrowers will find it much harder to raise enough cash in local currency to service debt denominated in foreign currencies. Market capitalization -- shortened to "market cap" -- is what it would cost to buy all of a company's stock at the current market price. It is calculated by multiplying the price of a share of stock by the number of outstanding shares. Often it is spoken of as the value the market is putting on the entire company. Although it is often used to represent the size of the company, market cap is strongly affected by the demand for the firm's stock and is not closely tied to other measures of size, such as number of employees, earnings, or book value. However, the stocks of smaller firms tend to be more volatile, reacting more strongly to changes in the economy or to their individual business prospects. Since they generally have a smaller base of earnings than larger firms, percentage increases up or down can be very large. 1 was unusually tightly focused, a sign that investors were sticking to the most familiar companies. International. Over the same period, international stocks averaged a 6% return, as measured by the Morgan Stanley EAFE (Europe, Australasia, and the Far East) Index. The advance came mostly in the three weeks ending January 8, 1999, with a great deal of market volatility around it. The Pacific region was recovering from a steep plunge over the prior two years. Although the European return also was substantial for such a short period, it trailed the world average slightly. It also represented a sharp bounce from its more brief and shallow decline in the summer of 1998. Japan's return to U.S. investors during this period was overwhelmingly due to the rise of the yen against the dollar. This rise of the yen was not helpful to Japan's economic recovery and, in fact, reversed early in January 1999. Two popular investment styles are growth and value. Growth managers look among the most rapidly growing companies for those with the best long-term prospects, while value managers look among neglected and inexpensive companies for those with the best earnings prospects or asset values for the dollar. Historically, at any given time one style has worked better than the other, but they have alternated in periods of superior performance. Our Performance. - ------------------------------------------------- Growth-style investing in U.S. stocks -- both large- and small-cap stocks, but primarily large -- was the most successful strategy during our reporting period. Since about a fifth of our assets are allocated to international stocks and about half of our domestic stocks to value-style investing, we trailed our Lipper Growth Fund Average benchmark. Portfolio managers who follow a disciplined approach are clearly focused on what they are looking for; we believe that they will generally perform better over the long term than less methodical investors, although no one investment style is superior in all markets. So we divided our stock allocation into portions to be invested in value and growth styles by different managers. Our large growth stocks were tightly focused on companies with above-average current and projected earnings growth. In a market that strongly favored that style, they performed even better than the growth-stock average, by a substantial margin. They had a focus on the technology and health-care sectors, which were market favorites. Our large value stocks also were invested in a very disciplined manner, and they suffered more than most in an environment hostile to their style. As we hoped, however, our growth- stock winners beat their benchmark by a much greater margin than our value stocks trailed theirs. In all the other asset classes, our holdings performed about in line with their benchmarks. 2 A Message to Our Shareholders March 26, 1999 - ------------------------------------------------------------ - ------------------- (PHOTO) Dear Shareholder, When I think about how Prudential's clients can benefit from their investments, one of my recent concerns is how misleading today's equity markets have become. Major index advances continue to be driven by the stocks of a handful of very large companies. These stocks are getting more and more expensive, out of proportion to their earnings expectations. As a result, a substantial disparity in value continues to grow between large and small companies and between growth and value stocks. Since not all stocks are benefiting from the highly publicized euphoria surrounding each record-breaking milestone, it is unlikely that these trends will continue. In fact, history shows that markets generally bring prices in line with earnings performance sooner or later. Diversification Is Critical. Instead of chasing recent market winners, investors should have a well-diversified asset allocation strategy in place and keep to it. It is also a good practice to rebalance your holdings when necessary to keep your asset allocation consistent with your long-term objectives and risk tolerance. A properly diversified portfolio of value- and growth-oriented mutual funds, bond funds and money market funds could help you weather inevitable market turbulence and receive more consistent returns over time. Prudential offers a wide range of mutual funds to help our shareholders diversify. Thank you for your continued confidence in Prudential mutual funds. Sincerely, John R. Strangfeld Chief Investment Officer Prudential Investments Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - ------------------- - ------------------------------------------------------------ - -------------------
Shares Description Value (Note 1) - ------------------------------------------------------------ LONG-TERM INVESTMENTS--92.3% COMMON STOCKS - ------------------------------------------------------------ Advertising--0.5% 700 Catalina Marketing Corp.(a) $ 46,725 5,600 Omnicom Group Inc. 358,400 -------- - --- 405,125 - ------------------------------------------------------------ Aerospace/Defense--0.9% 55,500 British Aerospace PLC (United Kingdom)(a) 421,517 900 Cordant Technologies Inc. 28,575 5,100 Gencorp Inc. 119,213 2,100 Raytheon Co. (Class 'A' Stock) 117,075 1,700 Raytheon Co. (Class 'B' Stock) 95,094 -------- - --- 781,474 - ------------------------------------------------------------ Airlines--0.7% 2,500 Alaska Air Group, Inc.(a) 125,937 3,500 Continental Airlines, Inc.(a) 119,438 18,000 Mesaba Holdings, Inc.(a) 360,000 -------- - --- 605,375 - ------------------------------------------------------------ Aluminum--0.3% 3,200 Alcoa Inc. 267,600 - ------------------------------------------------------------ Apparel--0.8% 3,500 Kellwood Co. 97,125 8,700 Tropical Sportswear Intl., Corp.(a) 294,712 27,200 Wolverine World Wide, Inc. 300,900 -------- - --- 692,737 - ------------------------------------------------------------ Appliances--0.2% 12,800 Electrolux AB, Series B (Sweden) 198,516 - ------------------------------------------------------------ Auto & Truck--1.7% 2,800 Arvin Industries, Inc. 110,775 2,600 Borg-Warner Automotive, Inc. 125,125 2,200 DaimlerChrysler AG (Germany) $ 229,348 101,200 LucasVarity PLC (United Kingdom) 482,980 2,000 General Motors Corp. 179,500 31,000 Nissan Motor Co., Ltd. (Japan)(a) 111,923 3,000 Varlen Corp. 72,000 4,800 Volvo AB, Series B (Sweden) 130,738 -------- - --- 1,442,389 - ------------------------------------------------------------ Banking--7.0% 11,600 Argentina, Caja Postal y Banco Hipotecario de Espana SA, (Spain)(a) 297,509 4,100 BancorpSouth, Inc. 70,469 8,500 Bank of New York Co., Inc. 301,750 1,400 Bank United Corp. (Class 'A' Stock) 56,000 6,200 BankAmerica Corp. 414,625 1,400 Banknorth Group, Inc. 41,825 3,600 Banque Nationale de Paris (France) 327,208 11,800 Chase Manhattan Corp. 907,862 1,500 City National Corp. 51,844 6,200 Commercial Federal Corp. 141,825 900 CORUS Bankshares, Inc. 30,600 3,600 Cullen/Frost Bankers, Inc. 186,975 3,940 CVB Financial Corp. 76,337 200 First Citizens BancShares, Inc. (Class 'A' Stock) 17,650 18,400 Golden State Bancorp Inc.(a) 343,850 2,300 Harbor Florida Bancshares, Inc. 25,588 6,400 HSBC Holdings PLC (Hong Kong)(a) 159,401 1,500 ING Groep N.V. (Netherlands)(a) 87,481 4,200 MAF Bancorp, Inc. 101,850 11,800 Merita PLC, Series A (Finland) 75,794 15,100 National Westminster Bank PLC (United Kingdom)(a) 277,824 10,800 Nordbanken Holding AB (Sweden) 74,751 3,700 North Fork Bancorporation, Inc. 77,700 7,500 Peoples Heritage Financial Group, Inc. 135,000 1,400 Queens County Bancorp Inc. 44,362 1,800 Republic New York Corp. 65,925
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 4 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - ------------------- - ------------------------------------------------------------ - -------------------
Shares Description Value (Note 1) - ------------------------------------------------------------ Banking (cont'd.) 19,100 Sao Paolo Imi SpA (Italy) $ 311,593 2,300 St Paul Bancorp, Inc. 53,188 52,000 Sumitomo Trust & Banking Co., Ltd. (Japan) 143,488 5,500 Svenska Handelsbanken, Series A (Sweden) 218,537 2,260 Unidanmark AS (Denmark) 188,279 31,000 United Overseas Bank Ltd. (Singapore) 185,102 1,900 Washington Federal, Inc. 48,806 5,500 Washington Mutual, Inc. 231,000 3,600 Westamerica Bancorporation 126,675 22,500 Westpac Banking Corp. (Australia) 155,764 -------- - --- 6,054,437 - ------------------------------------------------------------ Building & Construction--2.4% 3,400 American Standard Companies Inc.(a) 116,875 4,200 Centex Corp. 181,387 1,810 Compagnie de Saint Gobain (France) 253,508 9,600 D.R. Horton, Inc. 202,800 5,800 Lone Star Industries, Inc. 213,150 3,300 M.D.C. Holdings, Inc. 69,300 8,800 Pulte Corp. 265,650 2,900 Southdown, Inc. 161,131 4,300 Thomas Industries Inc. 79,013 8,100 Toll Brothers, Inc.(a) 186,300 5,100 U.S. Home Corp.(a) 181,050 8,500 Webb (Delaware E.) Corp. 221,000 -------- - --- 2,131,164 - ------------------------------------------------------------ Cable & Pay Television Systems--0.5% 11,000 Jones Intercable, Inc.(a) 396,000 - ------------------------------------------------------------ Chemicals--1.0% 1,900 Dow Chemical Co. 167,319 3,200 Eastman Chemical Co. 130,000 6,800 Hoechst AG (Germany) 292,216 20,500 Imperial Chemical Industries PLC (United Kingdom) 184,540 2,600 Spartech Corp. 62,075 -------- - --- 836,150 Computer Services--3.5% 7,900 3Com Corp.(a) $ 371,300 9,300 Affiliated Computer Services, Inc.(a) 448,725 2,300 Ascend Communications, Inc.(a) 200,819 5,900 Autodesk, Inc. 260,706 6,500 Cisco Systems, Inc.(a) 725,156 1,200 Computer Task Group, Inc. 31,425 3,300 Hypercom Corp.(a) 42,281 15,100 Platinum Technology International Inc.(a) 200,075 6,400 Symbol Technologies, Inc. 403,200 18,400 Xylan Corp.(a) 372,600 -------- - --- 3,056,287 - ------------------------------------------------------------ Computers--6.0% 12,000 Aspect Development, Inc.(a) 346,500 7,900 Cadence Design Systems, Inc.(a) 252,800 2,000 Citrix Systems, Inc.(a) 181,250 18,400 Compaq Computer Corp. 876,300 4,600 Dell Computer Corp.(a) 460,000 9,000 Hewlett-Packard Co. 705,375 2,200 International Business Machines Corp. 403,150 4,500 Microsoft Corp.(a) 787,500 2,900 NeoMagic Corp.(a) 40,781 11,700 Oracle Corp.(a) 647,888 600 SCM Microsystems, Inc.(a) 47,250 10,700 Seagate Technology, Inc.(a) 435,356 -------- - --- 5,184,150 - ------------------------------------------------------------ Consumer Products--1.4% 6,700 Avon Products, Inc. 247,481 1,700 Fossil, Inc.(a) 50,416 1,800 Hitachi Ltd. (ADR) 128,925 5,100 Mikasa, Inc. 58,013 9,200 Tandy Corp. 496,800 17,200 Unilever PLC (United Kingdom) 170,544 -------- - --- 1,152,179 - ------------------------------------------------------------ Distribution/Wholesalers--0.4% 15,500 Brightpoint, Inc.(a) 271,250 1,200 Ingram Micro Inc.(a) 36,375 -------- - --- 307,625
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 5 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - ------------------- - ------------------------------------------------------------ - -------------------
Shares Description Value (Note 1) - ------------------------------------------------------------ Diversfied Consumer Products--0.1% 2,200 Franklin Covey Co.(a) $ 36,575 2,300 InaCom Corp.(a) 30,044 -------- - --- 66,619 - ------------------------------------------------------------ Diversified Operations--0.8% 14,900 Granada Group PLC (United Kingdom) 266,175 1,550 Vivendi (France) 453,569 -------- - --- 719,744 - ------------------------------------------------------------ Diversified Manufacturing--1.5% 1,600 Crane Co. 43,500 3,900 CUNO, Inc.(a) 54,600 6,000 General Electric Co. 629,250 52,000 BTR Siebe PLC (United Kingdom) 176,287 3,650 Siemens AG (Germany) 259,551 95 Swatch Group AG (Switzerland)(a) 51,397 2,600 SPS Technologies, Inc.(a) 127,888 -------- - --- 1,342,473 - ------------------------------------------------------------ Electronics--0.5% 2,500 Koninklijke (Royal) Philips Electronics N.V. (Netherlands) 181,896 2,700 Sony Corp. (Japan) 196,123 1,200 Tecumseh Products Co. 53,625 -------- - --- 431,644 - ------------------------------------------------------------ Electronic Components--2.7% 5,600 AMP Inc. 294,700 8,200 Arrow Electronics, Inc.(a) 135,300 2,900 Avnet, Inc. 130,319 5,100 CHS Electronics, Inc(a) 76,181 1,800 CTS Corp. 85,612 20,600 Gentex Corp.(a) 471,225 1,400 Idacorp Inc. 46,025 1,400 Innovex, Inc. 26,775 10,000 Matsushita Electric Industrial Co., Ltd. (Japan) 169,861 3,000 Omron Corp. (Japan) 32,752 1,900 Pittway Corp. $ 53,319 5,000 Sanmina Corp. 331,250 4,800 Texas Instruments Inc. 474,600 -------- - --- 2,327,919 - ------------------------------------------------------------ Engineering & Construction--0.2% 15,500 ABB AB, Series A (Sweden) 151,982 - ------------------------------------------------------------ Entertainment--0.1% 10,900 EMI Group PLC (United Kingdom) 69,959 - ------------------------------------------------------------ Fertilizer--0.1% 1,900 Potash Corp. of Saskatchewan Inc. 114,950 - ------------------------------------------------------------ Financial Services--5.8% 1,300 American Express Co. 133,737 1,400 Arthur J. Gallagher & Co. 70,000 7,700 Associates First Capital Corp. 312,331 1,500 Chittenden Corp. 42,563 16,900 Citigroup Inc. 947,456 500 Dain Rauscher Corp. 15,438 4,200 Downey Financial Corp. 92,663 4,600 Eaton Vance Corp. 94,875 8,200 Financial Security Assurance Holdings Ltd. 450,487 2,100 Lehman Brothers Holdings Inc. 114,844 17,000 MBNA Corp. 474,937 1,200 Morgan (J.P.) & Co., Inc. 126,600 13,200 Morgan Stanley Dean Witter Discover & Co. 1,145,925 3,600 Orix Corp. (Japan) 245,405 3,300 Promise Co., Ltd. (Japan) 158,291 8,300 Resource Bancshares Mortgage Group, Inc. 123,462 4,850 Schwab (Charles) Corp. 341,016 2,100 Webster Financial Corp. 62,738 -------- - --- 4,952,768 - ------------------------------------------------------------ Food & Beverage--1.5% 600 Adolph Coors Co. 38,437 14,000 Asahi Breweries Ltd. (Japan) 188,705 7,700 Cadbury Schweppes PLC (United Kingdom) 122,917
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 6 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - ------------------- - ------------------------------------------------------------ - -------------------
Shares Description Value (Note 1) - ------------------------------------------------------------ Food & Beverage (cont'd.) 1,600 Corn Products International, Inc. $ 42,500 21,800 Diageo PLC (United Kingdom) 244,138 5,100 Heineken NV (Netherlands) 275,402 1,800 J & J Snack Foods Corp.(a) 43,650 99 Nestle SA (Switzerland) 181,687 1,100 Richfood Holdings, Inc. 25,506 3,600 Riviana Foods, Inc. 81,900 2,200 Universal Foods Corp. 49,500 -------- - --- 1,294,342 - ------------------------------------------------------------ Forestry--0.1% 4,100 Georgia-Pacific Corp. (Timber Group) 92,250 - ------------------------------------------------------------ Gas Distribution--0.4% 4,600 Energen Corp. 78,488 4,300 KeySpan Energy 116,369 2,200 ONEOK, Inc. 64,350 5,800 WICOR, Inc. 116,362 -------- - --- 375,569 - ------------------------------------------------------------ Health Care--2.9% 19,900 Columbia/HCA Healthcare Corp. 360,687 1,700 Curative Health Services, Inc. 50,894 16,800 Foundation Health Systems, Inc. 154,350 3,053 McKesson HBOC, Inc. 229,357 2,800 PacifiCare Health Systems, Inc.(a) 198,100 13,200 PAREXEL International Corp.(a) 343,200 672 Priority Healthcare Corp. 26,124 1,000 Safeskin Corp.(a) 23,375 2,200 Serologicals Corp.(a) 58,025 17,700 Tenet Healthcare Corp.(a) 367,275 3,200 United Healthcare Corp. 143,200 7,300 Wellpoint Health Networks Inc.(a) 546,131 -------- - --- 2,500,718 - ------------------------------------------------------------ Home Furnishings--0.7% 11,300 Ethan Allen Interiors Inc. 539,575 3,000 Furniture Brands International, Inc.(a) 70,500 -------- - --- 610,075 Hotels--0.5% 12,000 Hilton Hotels Corp. $ 173,250 12,000 Park Place Entertainment Corp.(a) 81,750 5,800 Promus Hotel Corp.(a) 173,275 -------- - --- 428,275 - ------------------------------------------------------------ Human Resources--0.5% 22,100 RemedyTemp, Inc.(a) 403,325 - ------------------------------------------------------------ Industrial Technology/Instruments--0.1% 3,700 EG&G, Inc. 104,987 - ------------------------------------------------------------ Insurance--6.6% 9,000 ACE Ltd. 252,000 633 Allianz AG (Germany) 232,439 12,200 Allied Zurich PLC (United Kingdom) 188,327 2,100 American Financial Group, Inc. 76,125 1,500 American General Corp. 106,969 4,200 American International Group, Inc. 432,337 1,800 Amerin Corp.(a) 41,850 2,000 Axa-UAP (France) 290,579 2,900 Capital Re Corp. 52,744 7,300 Chubb Corp. 428,875 5,100 Equitable Companies Inc. 355,725 2,190 Fidelity National Financial, Inc. 58,309 1,800 First American Financial Corp. 55,013 3,200 Harleysville Group Inc. 67,600 1,310 Medical Assurance Inc.(a) 39,955 6,600 Mutual Risk Management Ltd. 242,550 10,700 Old Republic International Corp. 209,319 1,400 Orion Capital Corp. 49,875 1,500 PartnerRe Ltd. 67,969 4,400 Presidential Life Corp. 81,950 3,300 Protective Life Corp. 114,056 3,800 Provident Companies, Inc. 162,925 20,100 Prudential Corp. PLC (United Kingdom) 310,442 5,400 Reinsurance Group of America, Inc. 363,487 28,900 Royal & Sun Alliance Insurance Group PLC (United Kingdom)(a) 220,325 9,900 SAFECO Corp. 384,862 5,500 St. Paul Companies Inc. 161,563
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 7 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - ------------------- - ------------------------------------------------------------ - -------------------
Shares Description Value (Note 1) - ------------------------------------------------------------ Insurance (cont'd.) 2,200 Tokio Marine & Fire Insurance Co. Ltd, ADR $ 125,400 1,900 UNUM Corp. 114,831 545 Zurich Versicherungs-Gesellschaft (Switzerland) 403,547 -------- - --- 5,691,948 - ------------------------------------------------------------ Machinery--0.5% 3,600 IDEX Corp. 82,125 3,200 JLG Industries, Inc. 50,400 6,400 Lincoln Electric Holdings, Inc. 135,200 1,800 Milacron Inc. 35,213 1,600 Regal-Beloit Corp. 36,800 2,600 Terex Corp.(a) 64,025 -------- - --- 403,763 - ------------------------------------------------------------ Manufacturing--0.3% 2,400 Compagnie Generale des Etablissements Michelin, Series B (France) 91,894 2,000 Nintendo Co. Ltd. (Japan) 185,679 -------- - --- 277,573 - ------------------------------------------------------------ Media--1.5% 16,800 CBS Corp.(a) 571,200 6,100 Clear Channel Communications, Inc.(a) 377,437 8,000 Infinity Broadcasting Corp.(a) 221,500 3,600 King World Productions, Inc.(a) 98,550 -------- - --- 1,268,687 - ------------------------------------------------------------ Metals--0.5% 27,600 Broken Hill Proprietary Co. Ltd. (Australia) 202,900 1,800 Cleveland-Cliffs Inc. 73,575 2,800 Commercial Metals Co. 68,950 1,400 Kaydon Corp. 46,987 2,200 RTI International Metals, Inc. 27,225 -------- - --- 419,637 Mining--0.4% 13,300 Freeport-McMoRan Copper & Gold Inc.(a) $ 127,181 10,600 Newmont Mining Corp. 187,488 -------- - --- 314,669 - ------------------------------------------------------------ Miscellaneous--0.2% 75 SGS Societe Generale de Surveillance Holding SA (Switzerland) 66,248 520 Thyssen AG (Germany) 88,083 -------- - --- 154,331 - ------------------------------------------------------------ Office Equipment & Supplies--1.1% 9,800 Harris Corp. 367,500 1,900 Kimball International, Inc. (Class 'B' Stock) 33,487 24,000 Ricoh Co., Ltd. (Japan) 233,130 2,400 Xerox Corp. 297,600 -------- - --- 931,717 - ------------------------------------------------------------ Oil & Gas--2.8% 1,200 Amerada Hess Corp. 57,000 3,900 Atlantic Richfield Co. 223,762 2,700 BOC Group PLC, ADR 76,275 19,500 BP Amoco PLC (United Kingdom) 265,715 3,000 Devon Energy Corp. 78,563 8,000 Elf Aquitaine SA, ADR 437,000 2,270 Elf Aquitaine SA (France) 246,194 36,300 ENI SPA (Italy) 215,417 6,300 Helmerich & Payne, Inc. 110,644 16,900 Newfield Exploration Co.(a) 314,762 4,200 Occidental Petroleum Corp. 63,263 5,900 Oryx Energy Co.(a) 71,906 1,490 R & B Falcon Corp.(a) 10,523 1,100 SEACOR SMIT Inc. 48,950 6,400 Tesoro Petroleum Corp 69,600 2,800 Total SA, ADR 143,325 -------- - --- 2,432,899
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 8 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - ------------------- - ------------------------------------------------------------ - -------------------
Shares Description Value (Note 1) - ------------------------------------------------------------ Paper & Packaging--2.6% 2,200 Ball Corp. $ 99,000 1,600 Caraustar Industries, Inc. 45,200 2,500 Fort James Corp 89,688 6,000 Georgia-Pacific Group 387,000 6,200 International Paper Co. 245,287 7,900 Mead Corp. 226,138 2,900 Rayonier Inc. 127,600 3,000 Rock-Tenn Co. (Class 'A' Stock) 54,000 4,200 Temple-Inland Inc. 239,662 3,200 Universal Forest Products Inc. 63,200 2,600 UPM-Kymmene Oyj (Finland) 67,984 4,800 Weyerhaeuser Co. 259,800 8,500 Willamette Industries, Inc. 297,500 -------- - --- 2,202,059 - ------------------------------------------------------------ Pharmaceuticals--4.7% 1,000 Alpharma Inc. 34,625 7,600 American Home Products Corp. 446,025 13,300 Astra AB, Series B (Sweden) 284,687 1,600 Bindley Western Industries Inc. 40,400 3,600 Eli Lilly & Co. 337,275 1,535 Medtronic, Inc. 122,282 2,600 Merck & Co., Inc. 381,550 1,600 Ocular Sciences, Inc.(a) 37,000 3,300 Pfizer Inc. 424,463 4,300 Pharmacia & Upjohn, Inc. 247,250 6,800 Rhone-Poulenc SA, Series A (France) 357,926 1,900 Roberts Pharmaceutical Corp. 37,050 16 Roche Holding AG (Switzerland) 209,222 9,700 Schering-Plough Corp. 528,650 3,500 ThermoQuest Corp.(a) 39,375 6,600 Warner-Lambert Co. 476,437 -------- - --- 4,004,217 - ------------------------------------------------------------ Photography--0.2% 3,100 Eastman Kodak Co. 202,662 Printing & Publishing--0.3% 1,000 Consolidated Graphics, Inc.(a) $ 72,500 2,300 Hollinger International Inc. 30,188 10,400 Mirror Group PLC (United Kingdom) 36,113 1,100 Valassis Communications, Inc.(a) 56,237 1,800 World Color Press, Inc.(a) 44,325 -------- - --- 239,363 - ------------------------------------------------------------ Real Estate Investment Trusts--0.9% 4,400 Franchise Finance Corp. of America 101,200 17,400 Glenborough Realty Trust Inc. 305,587 15,200 MeriStar Hospitality Corp. 292,600 4,300 Rouse Co. 101,588 -------- - --- 800,975 - ------------------------------------------------------------ Restaurants--1.6% 12,500 CKE Restaurants, Inc. 296,875 27,100 Darden Restaurants, Inc. 508,125 1,000 IHOP Corp. 43,000 4,600 McDonald's Corp. 362,537 13,100 Ryan's Family Steak Houses, Inc.(a) 180,944 -------- - --- 1,391,481 - ------------------------------------------------------------ Retail--5.2% 1,000 American Eagle Outfitters, Inc.(a) 68,375 1,000 BJ's Wholesale Club, Inc.(a) 44,500 1,900 Buckle Inc. 50,825 1,500 Department 56, Inc. 47,438 12,000 Dillard's Inc. (Class 'A' stock) 297,750 6,050 GAP, Inc. 388,334 13,700 Great Universal Stores PLC (United Kingdom) 175,521 9,600 Home Depot, Inc. 579,600 17,500 IKON Office Solutions Inc. 280,000 23,000 Kmart Corp.(a) 403,937 6,700 Kohl's Corp.(a) 453,925 4,840 Metro AG (Germany) 393,418 6,800 Pep Boys - Manny, Moe & Jack 107,100 4,300 Rite Aid Corp. 211,238
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 9 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - ------------------- - ------------------------------------------------------------ - -------------------
Shares Description Value (Note 1) - ------------------------------------------------------------ Retail (cont'd.) 3,400 Ross Stores, Inc. $ 134,300 2,500 Sears, Roebuck & Co. 100,313 10,500 Staples, Inc.(a) 300,562 8,100 Toys 'R' Us, Inc.(a) 121,500 2,200 Wal-Mart Stores, Inc. 189,200 2,200 Zale Corp.(a) 72,188 -------- - --- 4,420,024 - ------------------------------------------------------------ Semiconductors--1.8% 5,500 Applied Materials, Inc.(a) 347,531 5,300 Etec Systems, Inc.(a) 284,544 3,600 Intel Corp. 507,375 5,000 KLA-Tencor Corp.(a) 288,750 8,500 National Semiconductor Corp. 109,969 -------- - --- 1,538,169 - ------------------------------------------------------------ Software--3.1% 14,500 Cambridge Technology Partners, Inc.(a) 429,563 2,700 Check Point Software Technologies Ltd. 130,950 2,000 Dialogic Corp.(a) 51,000 6,400 Documentum Inc.(a) 149,200 12,300 HNC Software Inc.(a) 355,163 15,100 I2 Technologies Inc.(a) 526,612 2,900 Intuit, Inc.(a) 263,900 7,300 Rational Software Corp.(a) 241,356 5,900 VERITAS Software Corp.(a) 493,387 -------- - --- 2,641,131 - ------------------------------------------------------------ Steel - Producers--0.4% 9,900 AK Steel Holding Corp. 206,044 4,900 Reliance Steel & Aluminum Co. 134,137 -------- - --- 340,181 - ------------------------------------------------------------ Telecommunications--6.4% 3,900 Air Touch Communications, Inc.(a) 376,594 1,850 Alcatel (France) 215,785 2,900 Aliant Communications Inc. 123,250 3,700 ALLTEL Corp. 238,881 38,500 Aspect Telecommunications Corp.(a) 346,500 3,100 AT&T Corp. 281,325 12,500 Excel Switching Corporation 346,094 11,200 Loral Space & Communications Ltd.(a) $ 246,400 12,900 MCI WorldCom, Inc.(a) 1,028,775 31,000 Natural MicroSystems Corp.(a) 211,188 19 Nippon Telegraph & Telephone Corp. (Japan) 153,202 2,200 Nokia Corp. ADR(a) 316,800 6 NTT Mobile Communications (Japan) 252,729 7,800 Pacific Gateway Exchange, Inc.(a) 258,375 600 Plantronics Inc. 48,413 5,200 Qwest Communications International, Inc.(a) 311,675 2,200 Tekelec(a) 44,000 54,000 Telecom Italia SpA (Italy) 365,270 8,200 Telefonica SA (Spain) 375,217 -------- - --- 5,540,473 - ------------------------------------------------------------ Tobacco--2.2% 26,100 British America Tobacco PLC (United Kingdom) 270,388 28 Japan Tobacco, Inc. (Japan) 271,985 6,100 Loews Corp. 513,543 7,200 Philip Morris Co., Inc. 338,400 12,800 RJR Nabisco Holdings Corp. 345,600 3,600 Universal Corp 109,125 -------- - --- 1,849,041 - ------------------------------------------------------------ Trucking & Shipping--0.4% 15,700 Air Express International Corp. 296,337 2,300 USFreightways Corp. 80,213 -------- - --- 376,550 - ------------------------------------------------------------ Utilities--2.2% 3,200 Atmos Energy Corp. 95,400 3,200 BEC Energy 122,400 6,200 California Water Service Group 161,587 4,300 Calpine Corp.(a) 159,100 1,700 Cleco Corp. 53,550 2,600 Conectiv Inc. 58,500 8,200 Endesa SA (Spain) 228,300 2,100 GPU, Inc. 89,513 3,700 Houston Industries, Inc.(a) 112,387 4,600 Public Service Company of New Mexico(a) 86,538 900 Rochester Gas & Electric Corp. 25,875 1,250 Suez Lyonnaise des Eaux (France) 257,781
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 10 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - ------------------- - ------------------------------------------------------------ - -------------------
Shares Description Value (Note 1) - ------------------------------------------------------------ Utilities (cont'd.) 1,800 TNP Enterprises, Inc. $ 64,013 3,900 Unicom Corp. 138,937 65 Viag AG (Germany) 35,248 7,600 Washington Gas Light Co. 182,400 1,800 WPS Resources Corp. 58,950 -------- - --- 1,930,479 - ------------------------------------------------------------ Waste Management--0.6% 23,000 Safety-Kleen Corp.(a) 347,875 3,600 Waste Management, Inc. 179,775 -------- - --- 527,650 -------- - --- Total long-term investments (cost $73,818,555) 79,398,486 -------- - --- Principal Amount (000) SHORT-TERM INVESTMENTS--9.2% - ------------------------------------------------------------ REPURCHASE AGREEMENT $ 7,860 Joint Repurchase Agreement Account, 4.72%, 2/1/99 (Cost $7,860,000; Note 5) 7,860,000 -------- - --- - ------------------------------------------------------------ Total Investments--101.5% (cost $81,678,555; Note 4) 87,258,486 Liabilities in excess of other assets--(1.5%) (1,265,514) -------- - --- Net Assets--100% $85,992,972 -------- - --- -------- - ---
- --------------- (a) Non-income producing security. ADR--American Depository Receipt. AG--Aktiengesellschaft (German Stock Company). PLC--Public Limited Company (British Corporation). SA-- Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French Corporation). - ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 11 Statement of Assets and Liabilities PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - --------------------
Assets January 31, 1999 Investments, at value (cost $81,678,555)................................................ .................. $ 87,258,486 Foreign currency, at value (cost $103,033)................................................... ............. 100,455 Cash........................................................ .............................................. 87,440 Receivable for Fund shares sold........................................................ ................... 955,332 Receivable for investments sold........................................................ ................... 163,086 Deferred offering costs....................................................... ............................ 78,132 Dividends and interest receivable.................................................. ....................... 52,916 Forward currency contracts - net amount receivable from counterparties.................................... 307 - ---------------- Total assets...................................................... ..................................... 88,696,154 - ---------------- Liabilities Payable for investments purchased................................................... ...................... 2,366,881 Accrued expenses and other liabilities................................................. ................... 142,958 Payable for Fund shares reacquired.................................................. ...................... 112,873 Management fee payable..................................................... ............................... 52,185 Distribution fee payable..................................................... ............................. 23,557 Forward currency contracts - net amount payable to counterparties......................................... 3,762 Withholding taxes payable..................................................... ............................ 966 - ---------------- Total liabilities................................................. ..................................... 2,703,182 - ---------------- Net Assets...................................................... .......................................... $ 85,992,972 - ---------------- - ---------------- Net assets were comprised of: Shares of beneficial interest, at par......................................................... ......... $ 7,868 Paid-in capital in excess of par......................................................... .............. 79,286,869 - ---------------- 79,294,737 Accumulated net investment loss........................................................ ................ (66,080) Accumulated net realized gain on investments and foreign currency transactions......................... 1,187,220 Net unrealized appreciation on investments and foreign currency........................................ 5,577,095 - ---------------- Net assets, January 31, 1999........................................................ ...................... $ 85,992,972 - ---------------- - ---------------- Class A: Net asset value and redemption price per share ($6,491,347 / 593,865 shares of beneficial interest issued and outstanding)......................... $10.93 Maximum sales charge (5% of offering price)...................................................... ...... .58 - ---------------- Maximum offering price to public...................................................... ................. $11.51 - ---------------- - ---------------- Class B: Net asset value, offering price and redemption price per share ($16,933,926 / 1,551,895 shares of beneficial interest issued and outstanding)...................... $10.91 - ---------------- - ---------------- Class C: Net asset value and redemption price per share ($13,604,080 / 1,246,477 shares of beneficial interest issued and outstanding)...................... $10.91 Sales charge (1% of offering price)...................................................... .............. .11 - ---------------- Offering price to public...................................................... ......................... $11.02 - ---------------- - ---------------- Class Z: Net asset value, offering price and redemption price per share ($48,963,619 / 4,475,514 shares of beneficial interest issued and outstanding)...................... $10.94 - ---------------- - ----------------
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 12 PRUDENTIAL DIVERSIFIED FUNDS PRUDENTIAL HIGH GROWTH FUND Statement of Operations (Unaudited) - ------------------------------------------------------------
November 18, 1998(a) Through Net Investment Loss January 31, 1999 Income Interest............................ $ 112,325 Dividends (net of foreign withholding taxes of $1,477)..... 122,212 ----------- Total income..................... 234,537 ----------- Expenses Management fee...................... 113,635 Distribution fee--Class A........... 2,282 Distribution fee--Class B........... 21,727 Distribution fee--Class C........... 21,517 Custodian's fees and expenses....... 54,000 Amortization of offering costs...... 19,868 Registration fees................... 19,500 Reports to shareholders............. 16,000 Transfer agent's fees and expenses......................... 13,500 Legal fees.......................... 8,700 Audit fee and expenses.............. 7,300 Trustees' fees and expenses......... 1,250 Miscellaneous....................... 1,338 ----------- Total expenses................... 300,617 ----------- Net investment loss.................... (66,080) ----------- Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions Net realized gain (loss) on: Investment transactions............. 1,204,388 Foreign currency transactions....... (17,168) ----------- 1,187,220 ----------- Net unrealized appreciation (depreciation) on: Investments......................... 5,579,931 Foreign currency.................... (2,836) ----------- 5,577,095 ----------- Net gain on investments and foreign currencies.......................... 6,764,315 ----------- Net Increase in Net Assets Resulting from Operations $6,698,235 ----------- -----------
- --------------- (a) Commencement of investment operations. PRUDENTIAL DIVERSIFIED FUNDS PRUDENTIAL HIGH GROWTH FUND Statement of Changes in Net Assets (Unaudited) - ------------------------------------------------------------
November 18, 1998(a) Increase (Decrease) In Through Net Assets January 31, 1999 Operations Net investment loss..................... $ (66,080) Net realized gain on investments and foreign currency transactions........ 1,187,220 Net unrealized appreciation of investments and foreign currencies... 5,577,095 --------------- - ----- Net increase in net assets resulting from operations...................... 6,698,235 --------------- - ----- Fund share transactions (net of share conversions) (Note 6) Net proceeds from shares subscribed..... 83,526,501 Cost of shares reacquired............... (4,271,764) --------------- - ----- Net increase in net assets from Fund share transactions................... 79,254,737 --------------- - ----- Total increase............................. 85,952,972 Net Assets Beginning of period........................ 40,000 --------------- - ----- End of period.............................. $ 85,992,972 --------------- - ----- --------------- - -----
- --------------- (a) Commencement of investment operations. - ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 13 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - -------------------- Prudential Diversified Funds (the 'Trust') is registered under the Investment Company Act of 1940, as an open-end, diversified management investment company presently consisting of three Portfolios: Prudential Diversified Conservative Growth Fund, Prudential Diversified Moderate Growth Fund and Prudential Diversified High Growth Fund (the 'Fund'). The Trust was organized as a business trust in Delaware on October 24, 1997. The Fund had no significant operations other than the issuance of 1,000 shares each of Class A, Class B, Class C and Class Z shares for each Portfolio of beneficial interest for $40,000 on June 16, 1998 to Prudential Investments Fund Management LLC ('PIFM'). The Fund commenced investment operations on November 18, 1998. The investment objective of the Fund is to seek to provide long-term capital appreciation. The Fund pursues its objective by investing in a diversified portfolio of equity securities issued by U.S. and foreign companies. Under normal circumstances, substantially all of the Fund's assets will be invested in equity securities, including common stock, securities convertible into common stock and preferred stock. - ------------------------------------------------------------ Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund and the Series in the preparation of its financial statements. Securities Valuation: Securities listed on a securities exchange are valued at the last sales price on such exchange 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 last sale price, or if there was no sale on such day, at 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. Privately placed securities including equity securities for which market prices may be obtained from primary dealers shall be valued at the bid prices provided by such primary dealers. Securities for which market quotations are not readily available, may be valued using the last available market quotation for a period not to exceed five days, provided the Manager and Subadvisor feel this is representative of market value. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. In connection with transactions in repurchase agreements with U.S. financial institutions, it is the Funds' policy that its custodian or designated subcustodians, as the case may be under triparty repurchase agreements, take possession of the underlying securities, the value of which exceeds the principal amount of the repurchase transaction including accrued interest. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited. All securities are valued as of 4:15 p.m., New York time. Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) market value of investment securities, other assets and liabilities - at the closing daily rates of exchange. (ii) purchases and sales of investment securities, income and expenses - at the rate of exchange prevailing on the respective dates of such transactions. Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the fiscal period, the Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities held at the end of the period. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of long-term portfolio securities sold during the period. Accordingly, these realized foreign currency (losses) are included in the reported net realized (losses) on investment transactions. Net realized (losses) on foreign currency transactions represent net foreign exchange gains or losses from holdings of foreign currencies, currency gains or losses realized between the trade and settlement dates on security - ------------------------------------------------------------ - -------------------- 14 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - -------------------- transactions, and the difference between the amounts of dividends, interest and foreign taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains or losses from valuing foreign currency denominated assets and liabilities (other than investments) at fiscal period end exchange rates are reflected as a component of net unrealized appreciation on investments and foreign currencies. Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin as a result of, among other factors, the possibility of political and economic instability and the level of governmental supervision and regulation of foreign securities markets. Forward Currency Contracts: A forward currency contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The Fund enters into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings or on specific receivables and payables denominated in a foreign currency. The contracts are valued daily at current exchange rates any unrealized gain or loss is included in net unrealized appreciation or depreciation on investments. Gain or loss is realized on the settlement date of the contract equal to the difference between the settlement value of the original and renegotiated forward contracts. This gain or loss, if any, is included in net realized gain (loss) on foreign currency transactions. Risks may arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses from investment and currency transactions are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date; interest income is recorded on the accrual basis. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Net investment income (loss), other than distribution fees, and 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: The Fund expects to pay dividends of net investment income quarterly, and distributions of net realized capital and currency gains, if any, 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: For federal income tax purposes, each Fund in the Trust is treated as a separate taxpaying entity. It is the intent of the Fund to continue to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to 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 Offering Cost: The Fund incurred approximately $98,000 in connection with the organization of the Fund. Offering costs are being amortized over a period of 12 months ending November 1999. - ------------------------------------------------------------ Note 2. Agreements The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM manages the investment operations of the Fund, administers the Fund's affairs and supervises the subadviser's performance of all investment advisory services services. PIFM pays for the costs pursuant to the advisory agreements, the cost of compensation of officers of the Fund, occupancy and certain clerical and accounting costs of the Fund. The management fee paid PIFM is computed daily and payable monthly at an annual rate of .75% of the average daily net assets of the Fund. PIFM, in turn, pays the Advisers' fees, computed daily and paid monthly, equal to the annual rate specified below based on the average daily net assets of the Fund segments they manage.
Fee Paid By PIFM Advisers to Advisers - ------------------------------ -------------------------- - ------- Jennison Associates LLC .30% with respect to the first $300 million; .25% for amounts in excess of $300 million The Prudential Investment N/A1 Corporation Lazard Asset Management .40% Franklin Advisers, Inc. .50% The Dreyfus Corporation .45% 1Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by PIFM for its reasonable costs and expenses.
The Fund has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Class - ------------------------------------------------------------ - -------------------- 15 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - -------------------- A, Class B, Class C and Class Z shares of the Fund. The Fund compensates 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 PIMS. The distribution fees are accrued daily and payable monthly. No distribution or service fees are paid to PIMS as distributor for Class Z shares of the Fund. Pursuant to the Class A, B and C Plans, the Fund compensates 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 period ended January 31, 1999. PIMS has advised the Fund that it has received approximately $131,800 and $42,100 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the period ended January 31, 1999. PIMS has advised the Fund that for the period ended January 31, 1999, it has received approximately $1,700 and $700 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PIMS, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential Insurance Company of America. The Trust, 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 period ended January 31, 1999. 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 February 28, 1999 and has been extended through March 12, 1999 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 Trust's transfer agent. During the period ended January 31, 1999, the Fund incurred fees of approximately $2,900 for the services of PMFS. As of January 31, 1999 approximately $1,700 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. - ------------------------------------------------------------ Note 4. Portfolio Securities Purchases and sales of portfolio securities, excluding short- term investments, for the period ended January 31, 1999 were $77,030,728 and $4,416,561, respectively. At January 31, 1999, the Fund had outstanding forward currency contracts to purchase and sell foreign currencies as follows:
Value at Foreign Currency Settlement Date Current Appreciation Purchase Contracts Payable Value (Depreciation) - --------------------------------- --------------- ------- - - --------------- Euro Currency, expiring 2/26/99................ $ 96,127 $ 94,575 $(1,552) Pound Sterling, expiring 2/2/99................. 46,618 46,230 (388) Pound Sterling, expiring 2/1/99................. 111,089 110,306 (783) Japanese Yen, expiring 2/1/99................. 168,656 167,714 (942) Japanese Yen, expiring 2/2/99................. 18,779 18,682 (97) ------- ------- - - ------ $ 441,269 $437,507 $(3,762) ------- ------- - - ------ ------- ------- - - ------
Value at Foreign Currency Settlement Date Current Appreciation Sales Contracts Payable Value (Depreciation) - --------------------------------- --------------- ------- - - --------------- Euro Currency, expiring 2/1/99................. $ 104,729 $104,511 $ 218 Pound Sterling, expiring 2/1/99................. 16,724 16,635 89 ------- ------- - - --- $ 121,453 $121,146 $ 307 ------- ------- - - --- ------- ------- - - ---
The United States federal income tax basis of the Funds' investments as of January 31, 1999 was substantially the same as for financial reporting purposes and accordingly, net unrealized appreciation on investments for federal income tax purposes was $5,579,931 (gross unrealized appreciation-- $8,731,725, gross unrealized depreciation--$3,151,794). - ------------------------------------------------------------ Note 5. Joint Repurchase Agreement Account The Fund, along with other affiliated registered investment companies, transfers uninvested cash balances into a single joint account, the daily aggregate balance of which is invested in one or more repurchase agreements collateralized by U.S. Treasury or federal agency obligations. As of January 31, 1999, the Series had a 1.2% undivided interest in the repurchase agreements in the joint account. The undivided interest for the Series represents $7,860,000 in principal amount. As of such date, each - ------------------------------------------------------------ - -------------------- 16 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - -------------------- repurchase agreement in the joint account and the collateral therefore were as follows: Bear, Stearns & Co. Inc., 4.75%, in the principal amount of $200,000,000 repurchase price $200,079,167, due 2/1/99. The value of the collateral including accrued interest was $206,615,704. Salomon Brothers, Inc., 4.73%, in the principal amount of $200,000,000, repurchase price $200,078,833, due 2/1/99. The value of the collateral including accrued interest was $204,209,880. Morgan (J.P.) Securities Inc., 4.72%, in the principal amount of $200,000,000, repurchase price $200,078,667, due 2/1/99. The value of the collateral including accrued interest was $204,000,313. Warburg Dillon Read LLC, 4.62%, in the principal amount of $80,255,000, repurchase price of $80,285,898, due 2/1/99. The value of the collateral including accrued interest was $81,862,553. - ------------------------------------------------------------ Note 6. Capital The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 5%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Class B shares automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. A special exchange privilege is also available for shareholders who qualified to purchase Class A shares at net asset value. Class Z shares are not subject to any sales or redemption charge and are offered exclusively for sale to a limited group of investors. Of the 7,867,751 shares of beneficial interest issued and outstanding at January 31, 1999, Prudential owned 4,471,689. The Fund has authorized an unlimited number of shares of beneficial interest at $.001 par value. Transactions in shares of beneficial interest were as follows:
Class A Shares Amount - -------------------------------------- --------- ------- - ---- November 18, 1998(a) through January 31, 1999: Shares sold........................... 692,206 $ 7,114,794 Shares reacquired..................... (99,607) (1,014,320) --------- ------- - ---- Net increase in shares outstanding before conversion................... 592,599 6,100,474 Shares issued upon conversion from Class B............................. 266 2,685 --------- ------- - ---- Net increase in shares outstanding.... 592,865 $ 6,103,159 --------- ------- - ---- --------- ------- - ---- Class B - -------------------------------------- November 18, 1998(a) through January 31, 1999: Shares sold........................... 1,575,853 $16,237,667 Shares reacquired..................... (24,691) (264,138) --------- ------- - ---- Net increase in shares outstanding before conversion................... 1,551,162 15,973,529 Shares reacquired upon conversion into Class A............................. (267) (2,685) --------- ------- - ---- Net increase in shares outstanding.... 1,550,895 $15,970,844 --------- ------- - ---- --------- ------- - ---- Class C - -------------------------------------- November 18, 1998(a) through January 31, 1999: Shares sold........................... 1,278,342 $13,005,290 Shares reacquired..................... (32,865) (342,060) --------- ------- - ---- Net increase in shares outstanding.... 1,245,477 $12,663,230 --------- ------- - ---- --------- ------- - ---- Class Z - -------------------------------------- November 18, 1998(a) through January 31, 1999: Shares sold........................... 4,716,512 $47,168,750 Shares reacquired..................... (241,998) (2,651,246) --------- ------- - ---- Net increase in shares outstanding.... 4,474,514 $44,517,504 --------- ------- - ---- --------- ------- - ----
- --------------- (a) Commencement of investment operations. - ------------------------------------------------------------ - -------------------- 17 PRUDENTIAL DIVERSIFIED FUNDS Financial Highlights (Unaudited) PRUDENTIAL HIGH GROWTH FUND - ------------------------------------------------------------ - --------------------
Class A Class B Class C - ------------ ------------ ------------ November 18, November 18, November 18, 1998(a) 1998(a) 1998(a) Through Through Through January 31, January 31, January 31, 1999(d) 1999(d) 1999(d) - ------------ ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period........................................ $10.00 $ 10.00 $ 10.00 - ----- ------ ------ Income from investment operations: Net investment income...................................................... . (0.01) (0.02) (0.02) Net realized and unrealized gain on investment and foreign currency transactions................................................ ............. 0.94 0.93 0.93 - ----- ------ ------ Total from investment operations......................................... 0.93 0.91 0.91 - ----- ------ ------ Net asset value, end of period.............................................. $10.93 $ 10.91 $ 10.91 - ----- ------ ------ - ----- ------ ------ TOTAL RETURN(b)................................................... .......... 9.30% 9.10% 9.10% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)............................................. $6,491 $ 1,934 $ 13,604 Average net assets (000).................................................... $4,442 $ 10,574 $ 10,471 Ratios to average net assets:(c) Expenses, including distribution fees.................................... 1.96% 2.71% 2.71% Expenses, excluding distribution fees.................................... 1.71% 1.71% 1.71% Net investment loss...................................................... (0.44)% (1.24)% (1.19)% Portfolio turnover rate..................................................... 6% 6% 6% Class Z - ------------ November 18, 1998(a) Through January 31, 1999(d) - ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period........................................ $ 10.00 - ------ Income from investment operations: Net investment income...................................................... . -- Net realized and unrealized gain on investment and foreign currency transactions................................................ ............. 0.94 - ------ Total from investment operations......................................... 0.94 - ------ Net asset value, end of period.............................................. $ 10.94 - ------ - ------ TOTAL RETURN(b)................................................... .......... 9.40% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)............................................. $ 48,248 Average net assets (000).................................................... $ 48,964 Ratios to average net assets:(c) Expenses, including distribution fees.................................... 1.71% Expenses, excluding distribution fees.................................... 1.71% Net investment loss...................................................... (0.10)% Portfolio turnover rate..................................................... 6%
- --------------- (a) Commencement of investment operations. (b) Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total return for periods of less than a full year are not annualized. (c) Annualized. (d) Based on weighted average shares outstanding during the period. - ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 18 Getting The Most From Your Prudential Mutual Fund. How many times have you read these letters -- or other financial materials -- and stumbled across a word that you don't understand? Many shareholders have run into the same problem. We'd like to help. So we'll use this space from time to time to explain some of the words you might have read, but not understood. And if you have a favorite word that no one can explain to your satisfaction, please write to us. Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis points. Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate mortgage pools into different maturity classes, called tranches. These instruments are sensitive to changes in interest rates and homeowner refinancing activity. They are subject to prepayment and maturity extension risk. Derivatives: Securities that derive their value from other securities. The rate of return of these financial instruments rises and falls -- sometimes very suddenly -- in response to changes in some specific interest rate, currency, stock, or other variable. Discount Rate: The interest rate charged by the Federal Reserve on loans to member banks. Federal Funds Rate: The interest rate charged by one bank to another on overnight loans. Futures Contract: An agreement to purchase or sell a specific amount of a commodity or financial instrument at a set price at a specified date in the future. Leverage: The use of borrowed assets to enhance return. The expectation is that the interest rate charged on borrowed funds will be lower than the return on the investment. While leverage can increase profits, it can also magnify losses. Liquidity: The ease with which a financial instrument (or product) can be bought or sold (converted into cash) in the financial markets. Price/Earnings Ratio: The price of a share of stock divided by the earnings per share for a 12-month period. Option: An agreement to purchase or sell something, such as shares of stock, by a certain time for a specified price. An option need not be exercised. Spread: The difference between two values; often used to describe the difference between "bid" and "asked" prices of a security, or between the yields of two similar maturity bonds. Yankee Bond: A bond sold by a foreign company or government in the U.S. market and denominated in U.S. dollars. Getting The Most From Your Prudential Mutual Fund. When you invest through Prudential Mutual Funds, you receive financial advice through a Prudential Securities financial advisor or Prudential/Pruco Securities registered representative. Your advisor or representative can provide you with the following services: There's No Reward Without Risk; But Is This Risk Worth It? Your financial advisor or registered representative can help you match the reward you seek with the risk you can tolerate. And risk can be difficult to gauge -- sometimes even the simplest investments bear surprising risks. The educated investor knows that markets seldom move in just one direction -- there are times when a market sector or asset class will lose value or provide little in the way of total return. Managing your own expectations is easier with help from someone who understands the markets and who knows you! Keeping Up With The Joneses. A financial advisor or registered representative can help you wade through the numerous mutual funds available to find the ones that fit your own individual investment profile and risk tolerance. While the newspapers and popular magazines are full of advice about investing, they are aimed at generic groups of people or representative individuals, not at you personally. Your financial advisor or registered representative will review your investment objectives with you. This means you can make financial decisions based on the assets and liabilities in your current portfolio and your risk tolerance -- not just based on the current investment fad. Buy Low, Sell High. Buying at the top of a market cycle and selling at the bottom are among the most common investor mistakes. But sometimes it's difficult to hold on to an investment when it's losing value every month. Your financial advisor or registered representative can answer questions when you're confused or worried about your investment, and remind you that you're investing for the long haul. Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 http://www.prudential.com Trustees Eugene C. Dorsey Douglas H. McCorkindale Thomas T. Mooney Officers Robert F. Gunia, President Grace C. Torres, Treasurer Stephen M. Ungerman, Assistant Treasurer David F. Connor, Secretary Manager Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Investment Sub-Advisers The Prudential Investment Corporation Prudential Plaza Newark, NJ 07102-3777 Jennison Associates LLC 466 Lexington Avenue New York, NY 10017 Franklin Advisers, Inc. 777 Mariners Island Blvd. San Mateo, CA 94404 The Dreyfus Corporation 200 Park Avenue New York, NY 10166 Lazard Asset Management 30 Rockefeller Plaza New York, NY 10112 Distributor Prudential Investment Management Services LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Custodian State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 Transfer Agent Prudential Mutual Fund Services LLC Raritan Plaza One Edison, NJ 08837 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Legal Counsel Kirkpatrick & Lockhart LLP 1800 Massachusetts Ave., N.W. Washington, DC 20036 The views expressed in this report and information about the Fund's portfolio holdings are for the period covered by this report and are subject to change thereafter. The accompanying financial statements as of January 31, 1999 were not audited and, accordingly, no opinion is expressed on them. This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. (LOGO) Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 74432F885 74432F877 MF186E2 74432F869 74432F851 Prudential Diversified FundsSM (ICON) Prudential Diversified Conservative Growth Fund SEMI ANNUAL REPORT Jan. 31, 1999 (LOGO) Prudential Diversified Conservative Growth Fund Performance At A Glance. Over the period from its inception on November 18, 1998 through January 31, 1999, the Prudential Diversified Conservative Growth Fund performed in line with the Lipper Balanced Fund Index, even though the Fund's 40% of assets allocated to stocks is less than typical balanced portfolios. The largest contribution to our return came from our growth stocks. Returns of two popular styles of stock investing -- value and growth -- diverged considerably in performance over this short period. Investors strongly preferred growth companies, particularly large familiar ones. Cumulative Total Returns1 As of 1/31/99
Since Since Inception2 Inception2 (Without Sales Charge) (With Sales Charge) Class A 5.33% 0.06% Class B 5.25 0.25 Class C 5.25 3.19 Class Z 5.45 5.45 Lipper Balanced Fund Avg.3 6.24 N/A
Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1 Source: Prudential Investments Fund Management and Lipper, Inc. Since the Fund has been in existence less than one year, no average annual total returns are presented. The Fund charges a maximum front-end sales charge of 5% for Class A shares. Class B shares are subject to a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically convert to Class A shares, on a quarterly basis, approximately seven years after purchase. Class C shares are subject to a front-end sales charge of 1% and a CDSC of 1% for 18 months. Class Z shares are not subject to a sales charge or distribution fee. 2 Inception dates: Class A, B, C, and Z, 11/18/98. 3 The Lipper Since Inception return is for all funds in each share class. Investment Advisers' Report Prudential Investments Fund Management LLC - - John Van Belle, Ph.D. - - Stacie Mintz Sub-Advisers The Dreyfus Corporation Franklin Advisers, Inc. Jennison Associates LLC Pacific Investment Management Company The Prudential Investment Corporation The Fund seeks to provide current income and a reasonable level of capital appreciation. It invests in a diversified portfolio of bonds and stocks. There can be no assurance that the Fund will achieve its investment objective. Conservative Growth Fund Diversification Target (PIE CHART) Diversification -- spreading your investments over many different securities -- is a basic principle of investing. It helps to reduce the overall risk of your portfolio. Moreover, when we rebalance our portfolio to restore the original weighting of different asset classes, the discipline forces us to sell high and buy low. Over time, this may improve your return. What Is Diversification? Diversification -- This is how diversification works: Mutual funds not only provide professional money management, they also allow a relatively small investment to be spread over many different securities. When you own a large number of different securities, the impact of any one on your return is reduced. In addition, if you diversify your investments among asset classes and investment styles -- between stocks and bonds, value and growth stocks, and investment grade and high yield bonds -- it is less likely that all the securities you own will move in the same direction at one time. The Prudential Diversified Funds provide more of this buffering than a fund investing in only one asset class. We believe this will result in smoother returns over time. Rebalancing -- The Diversified Conservative Growth Fund has a target balance of the various asset classes. As some perform better than others, the portfolio will drift from this original balance: the securities that rise most will become a larger proportion of the invested assets. We direct new investments to the asset classes that have fallen below their target ratio and, when necessary, sell appreciated securities to maintain the balance. This not only keeps your risk exposure from changing too much, but it may reduce the average cost of our investments and increase our average selling price over time. Although an individual investor can diversify and rebalance, it would require a large investment to own the range of asset classes represented in the Prudential Diversified Conservative Growth Fund. Moreover, calculating the amounts to allocate to each kind of security in a rebalancing would be difficult. Prudential Diversified Funds do it all for you. Asset classes are classifications of investments. The most basic classification of securities is among stocks, bonds, and money market investments. Stocks are shares of ownership in a firm. Owners share in the profits, after debts are paid, and share in the firm's appreciation in value. Generally, the prices of stocks vary with investors' estimates of a firm's earning prospects, including the impact of broader economic conditions. Bonds are loans to a company, government, or agency. They carry a fixed interest rate or one that varies according to a rule that is specified in the bond. They have a maturity date at which they must be repaid. Generally bond prices vary with current interest rates for new bonds and with changes in the debtor's prospects of repaying the loan. Money market instruments are very short-term loans, 13 months or less. Bonds and money market instruments are called fixed-income securities. The Economic Context. At the time we opened the Prudential Diversified Funds in November 1998, global financial markets had been unsettled first by an economic recession in Asia and then by debt defaults in Russia and China. Both stock and bond prices had fallen sharply, except for United States Treasury bonds, which increased in price as investors tried to avoid any risk at all. In response to the turmoil, European central banks reduced interest rates to reassure investors about European economic growth and the U.S. Federal Reserve Bank made the dramatic move of reducing rates three times within a two-month period. (Lower interest rates are expected to stimulate economic activity.) U.S. stock markets began to climb again in October, rebounding from their earlier fall. Lower interest rates mean higher bond prices for older bonds because they provide a larger stream of interest payments. However, as the economy heats up, interest rates normally rise again as demand for credit increases. This was the setting for our initial investments in mid-November. Early in 1999, it became clearer that the U.S. economy was growing rapidly, but concerns about economies elsewhere continued. The Financial Markets. Investors continued to feel insecure despite the market bounce, so stock market advances in the United States were focused on the very largest growth companies. A standard benchmark for U.S. large-cap stocks is the S&P 500 Index. The S&P 500 rose 12% during our reporting period -- November 18, 1998 through the end of January 1999 -- while the stocks of smaller companies rose only 9% (measured by the Russell 2000 Small-Cap Index). Growth & Value. Growth-style stocks also were significantly favored over value stocks in all market-cap sectors. In the large caps, growth stocks returned 16%, while value returned only 8%. Among small caps, the difference was even more marked. These differences were generally due to the strong performance of a few of the larger growth-style stocks, while most other stocks languished. The concentration of performance was unusually tightly focused,a United States Treasury bonds are backed by the full faith and credit of the U.S. government, so investors view them as among the safest investments. Because of their safety, they generally carry a lower yield than corporate or foreign government bonds. When investors are more fearful, the demand for these safest of all securities increases and their price rises, while other bonds generally fall in value. A decline in value makes the bond's fixed interest payments amount to a higher yield on its purchase price. Market capitalization -- shortened to "market cap" -- is what it would cost to buy all of a company's stock at the current market price. It is calculated by multiplying the price of a share of stock by the number of outstanding shares. Often it is spoken of as the value the market is putting on the entire company. Although it is often used to represent the size of the company, market cap is strongly affected by the demand for the firm's stock and is not closely tied to other measures of size, such as number of employees, earnings, or book value. Stock portfolios can be invested in either of two different investment styles: growth or value. Growth managers look among the most rapidly growing companies for those with the best long-term prospects, while value managers look among neglected and inexpensive companies for those with the best earnings growth prospects or asset values for the dollar. Historically, one style has worked better than the other at any given time, but they have alternated in periods of superior performance. Continued... 1 The Financial Markets Cont'd sign that investors were sticking to the most familiar companies. Bonds. Bond index returns were one to two percentage points, generally much more modest than stock index gains over this period. It is worth mentioning that when stock markets around the world plunged in August 1998, bonds were an important stabilizing factor. Although they also fell, they fell much less than stocks. Similarly, when U.S. stock markets dropped in February 1999, after our reporting period ended, bonds again were a stabilizing factor. However, high yield bonds often perform differently from other fixed-income securities. In December, when investors still were jumpy, they lost a little ground. In January, however, they more than made it up, the Lehman High Yield Index provided twice the return of the Lehman Aggregate Index. Our Performance. Our large growth stocks made the most substantial return to our Fund over our reporting period. Our 60% allocation to bonds is somewhat higher than the typical balanced fund. This would have kept our return well below the Lipper Balanced Fund Average over this period if our large growth stocks had not performed so well. Portfolio managers who follow a disciplined approach are clearly focused on what they are looking for; we believe that they will generally perform better over the long term than less methodical investors. However, no one investment style is superior in all markets. Consequently, our stock allocation is divided into portions to be invested in a value and in a growth style. Our growth stocks were tightly focused on companies with above-average current and projected earnings growth. In a market that strongly favored that style, they performed even better than the growth-stock average, by a substantial margin. They had a focus on the technology and health-care sectors, which were market favorites. Our value stocks also were invested in a very disciplined manner, and they suffered more than most in an environment hostile to their style. As we hoped, however, our growth-stock winners were ahead of the average by a much greater margin than our value stocks trailed. In all the other asset classes, our holdings performed about in line with their benchmarks. 2 A Message to Our Shareholders March 26, 1999 (PHOTO) Dear Shareholder, When I think about how Prudential's clients can benefit from their investments, one of my recent concerns is how misleading today's equity markets have become. Major index advances continue to be driven by the stocks of a handful of very large companies. These stocks are getting more and more expensive, out of proportion to their earnings expectations. As a result, a substantial disparity in value continues to grow between large and small companies and between growth and value stocks. Since not all stocks are benefiting from the highly publicized euphoria surrounding each record-breaking milestone, it is unlikely that these trends will continue. In fact, history shows that markets generally bring prices in line with earnings performance sooner or later. Diversification Is Critical. Instead of chasing recent market winners, investors should have a well-diversified asset allocation strategy in place and keep to it. It is also a good practice to rebalance your holdings when necessary to keep your asset allocation consistent with your long-term objectives and risk tolerance. A properly diversified portfolio of value- and growth-oriented mutual funds, bond funds and money market funds could help you weather inevitable market turbulence and receive more consistent returns over time. Prudential offers a wide range of mutual funds to help our shareholders diversify. Thank you for your continued confidence in Prudential mutual funds. Sincerely, John R. Strangfeld Chief Investment Officer Prudential Investments 3 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) -------------------------------------------------------- - ---- LONG-TERM INVESTMENTS--86.1% COMMON STOCKS--39.1% -------------------------------------------------------- - ---- Advertising--0.3% 250 Catalina Marketing Corp.(a) $ 16,687 3,200 Omnicom Group, Inc. 204,800 ------- - --- 221,487 - ------------------------------------------------------------ Aerospace/Defense--0.5% 275 Cordant Technologies, Inc. 8,731 1,675 Gencorp, Inc. 39,153 1,100 General Motors Corp., Class H 98,725 6,200 Loral Space & Communications, Inc. 136,400 1,200 Raytheon Co. (Class 'A' Stock) 66,900 1,000 Raytheon Co. (Class 'B' Stock) 55,938 ------- - --- 405,847 - ------------------------------------------------------------ Airlines--0.3% 800 Alaska Air Group, Inc.(a) 40,300 1,150 Continental Airlines, Inc.(a) 39,244 6,500 Mesaba Holdings, Inc.(a) 130,000 ------- - --- 209,544 - ------------------------------------------------------------ Aluminum--0.2% 1,800 Alcoa, Inc. 150,525 1,600 Reliance Steel & Aluminum Co. 43,800 ------- - --- 194,325 - ------------------------------------------------------------ Apparel--0.3% 300 American Eagle Outfitters, Inc. 20,513 1,100 Kellwood Co. 30,525 3,300 Tropical Sportswear Intl., Inc. 111,787 9,500 Wolverine World Wide, Inc. 105,094 ------- - --- 267,919 - ------------------------------------------------------------ Auto & Truck--0.6% 900 Arvin Industries, Corp.(a) 35,607 825 Borg-Warner Automotive, Inc. 39,703 53,400 Lucas Varity PLC (United Kingdom) $ 254,853 8,000 Safety Kleen Corp. 121,000 975 Varlen Corp. 23,400 ------- - --- 474,563 - ------------------------------------------------------------ Banking--2.0% 1,325 BancorpSouth, Inc. 22,773 4,600 Bank of New York Co., Inc. 163,300 200 Bank United Corp. (Class 'A' Stock) 8,000 3,500 BankAmerica Corp. 234,062 450 Banknorth Group, Inc. 13,444 6,500 Chase Manhattan Corp. 500,094 475 City National Corp. 16,417 2,000 Commercial Federal Corp. 45,750 275 CORUS Bankshares, Inc. 9,350 1,175 Cullen/Frost Bankers, Inc. 61,027 1,293 CVB Financial Corp. (Class 'A' Stock) 25,042 75 First Citizens Bancshares, Inc. 6,619 6,500 Golden State Bancorp, Inc.(a) 121,469 775 Harbor Florida Bancshares, Inc. 8,622 1,350 MAF Bancorp, Inc. 32,737 1,225 North Fork Bancorporation, Inc. 25,725 2,425 Peoples Heritage Financial Group, Inc. 43,650 450 Queens County Bancorp, Inc. 14,259 800 Republic New York Corp. 29,300 775 St Paul Bancorp, Inc. 17,922 625 Washington Federal, Inc. 16,055 3,200 Washington Mutual, Inc. 134,400 1,175 Westamerica Bancorporation 41,345 ------- - --- 1,591,362 - ------------------------------------------------------------ Building & Construction--0.8% 1,900 American Standard Companies, Inc.(a) 65,313 2,300 Centex Corp. 99,331 1,850 Lone Star Industries, Inc. 67,987 1,075 M.D.C. Holdings, Inc. 22,575 2,875 Pulte Corp. 86,789 925 Southdown, Inc. 51,395
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 4 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Building & Construction (cont'd.) 1,375 Thomas Industries, Inc.(a) $ 25,266 2,625 Toll Brothers, Inc. 60,375 1,675 U.S. Home Corp.(a) 59,463 2,350 Webb Delaware Corp. 61,100 ------- - --- 599,594 - ------------------------------------------------------------ Cable & Pay Television Systems--0.2% 4,000 Jones Intercable, Inc.(a) 144,000 - ------------------------------------------------------------ Chemicals--0.2% 1,000 Dow Chemical Co. 88,062 1,800 Eastman Chemical Co. 73,125 825 Spartech Corp. 19,697 ------- - --- 180,884 - ------------------------------------------------------------ Computer Services--2.0% 4,700 3Com Corp.(a) 220,900 3,200 Affiliated Computer Services, Inc.(a) 154,400 925 Alliant Communications, Inc. 39,313 1,300 Ascend Communications, Inc.(a) 113,506 3,500 Autodesk, Inc. 154,656 3,700 Cisco Systems, Inc.(a) 412,781 375 Computer Task Group, Inc. 9,820 1,075 Hypercom Corp.(a) 13,774 8,900 Platinum Technology, Inc.(a) 117,925 3,800 Symbol Technologies, Inc. 239,400 6,400 Xylan Corp.(a) 129,600 ------- - --- 1,606,075 - ------------------------------------------------------------ Computers--3.6% 4,000 Aspect Development, Inc.(a) 115,500 4,600 Cadence Design Systems, Inc.(a) 147,200 650 Citrix Systems, Inc.(a) 58,906 10,300 Compaq Computer Corp. 490,538 2,700 Dell Computer Corp.(a) 270,000 5,000 Hewlett-Packard Co. 391,875 1,200 International Business Machines Corp. 219,900 2,800 Microsoft Corp.(a) 490,000 925 Neomagic Corp.(a) $ 13,008 6,800 Oracle Systems Corp.(a) 376,550 5,900 Seagate Technology, Inc.(a) 240,056 200 Sun Microsystems, Inc. 15,750 ------- - --- 2,829,283 - ------------------------------------------------------------ Consumer Products--0.6% 3,900 Avon Products, Inc. 144,056 550 Fossil, Inc.(a) 16,311 900 Hitachi Ltd. ADR 64,463 1,675 Mikasa, Inc. 19,053 4,800 Tandy Corp. 259,200 ------- - --- 503,083 - ------------------------------------------------------------ Distribution/ Wholesalers--0.2% 7,000 Brightpoint, Inc.(a) 122,500 375 Ingram Micro, Inc.(a) 11,367 ------- - --- 133,867 - ------------------------------------------------------------ Diversified Manufacturing--0.5% 525 Crane Co. 14,273 1,200 Cuno, Inc. 16,800 3,500 General Electric Co. 367,063 825 SPS Technologies, Inc.(a) 40,580 ------- - --- 438,716 - ------------------------------------------------------------ Electronic Components--1.2% 3,100 AMP, Inc. 163,137 4,500 Arrow Electronics, Inc.(a) 74,250 1,700 Avnet, Inc. 76,394 1,675 CHS Electronics, Inc.(a) 25,020 600 CTS Corp. 28,538 7,000 Gentex Corp.(a) 160,125 450 Idacorp, Inc. 14,794 450 Innovex, Inc. 8,606 625 Pittway Corp. 17,539 2,000 Sanmina Corp. 132,500 2,800 Texas Instruments, Inc. 276,850 ------- - --- 977,753
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 5 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Fertilizer--0.1% 875 Potash Corp. of Saskatchewan Inc. $ 52,938 - ------------------------------------------------------------ Financial Services--2.9% 600 American Express Co. 61,725 450 Arthur J. Gallagher & Co. 22,500 4,700 Associates First Capital Corp. 190,644 475 Chittenden Corp. 13,478 9,500 Citigroup, Inc. 532,594 175 Dain Rauscher Corp. 5,403 1,350 Downey Financial Corp. 29,784 1,500 Eaton Vance Corp. 30,937 2,850 Financial Security Holdings, Ltd. 156,572 500 Morgan (J.P.) & Co., Inc. 52,750 1,000 Lehman Brothers Holdings, Inc. 54,687 10,000 MBNA Corp. 279,375 7,500 Morgan Stanley Dean Witter Discover & Co. 651,094 2,700 Resource Bancshares Mortgage Group, Inc. 40,162 2,850 Schwab Charles Corp. 200,391 700 Webster Financial Corp. 20,913 ------- - --- 2,343,009 - ------------------------------------------------------------ Food & Beverage--0.1% 200 Adolph Coors Co. 12,813 525 Corn Products International, Inc. 13,945 600 J & J Snack Foods Corp.(a) 14,550 350 Richfood Holdings, Inc. 8,116 1,175 Riviana Foods, Inc. 26,731 725 Universal Foods Corp. 16,312 ------- - --- 92,467 - ------------------------------------------------------------ Gas Distribution--0.2% 1,500 Energen Corp. 25,594 2,300 KeySpan Energy Corp. 62,244 725 ONEOK, Inc. 21,206 1,875 WICOR, Inc. 37,617 ------- - --- 146,661 Health Care--1.6% 10,900 Columbia/HCA Healthcare Corp. $ 197,562 550 Curative Health Services, Inc. 16,466 9,200 Foundation Health Systems, Inc. 84,525 1,754 Mckesson HBOC, Inc. 131,769 1,500 PacifiCare Health Systems, Inc.(a) 106,125 4,400 PAREXEL International Corp.(a) 114,400 300 Safeskin Corp.(a) 7,012 725 Serologicals Corp.(a) 19,122 9,600 Tenet Healthcare Corp.(a) 199,200 1,700 United Healthcare Corp. 76,075 3,900 Wellpoint Health Networks, Inc.(a) 291,769 ------- - --- 1,244,025 - ------------------------------------------------------------ Home Furnishings--0.3% 3,900 Ethan Allen Interiors, Inc. 186,225 975 Furniture Brands International, Inc.(a) 22,913 ------- - --- 209,138 - ------------------------------------------------------------ Hotels--0.3% 6,600 Hilton Hotels Corp. 95,287 6,600 Park Place Entertainment Corp.(a) 44,963 3,400 Promus Hotel Corp.(a) 101,575 ------- - --- 241,825 - ------------------------------------------------------------ Human Resources--0.2% 7,800 RemedyTemp, Inc.(a) 142,350 - ------------------------------------------------------------ Insurance--2.6% 5,300 ACE, Ltd. 148,400 1,000 American Financial Group, Inc. 36,250 800 American General Corp. 57,050 2,500 American International Group, Inc. 257,344 600 Amerin Corp.(a) 13,950 925 Capital Re Corp. 16,823 3,900 Chubb Corp. 229,125 715 Fidelity National Financial, Inc. 19,037 600 First American Financial Corp. 18,338
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 6 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Insurance (cont'd.) 1,050 Harleysville Group, Inc. $ 22,181 413 Medical Assurance, Inc.(a) 12,581 4,000 Mutual Risk Management, Ltd. 147,000 6,000 Old Republic International Corp. 117,375 450 Orion Capital Corp. 16,031 475 Partnerre Ltd. 21,523 1,425 Presidential Life Corp. 26,541 235 Priority Healthcare Corp. 9,143 1,075 Protective Life Corp. 37,155 2,300 Provident Companies, Inc. 98,613 1,900 Reinsurance Group of America, Inc. 127,894 5,600 SAFECO Corp. 217,700 3,000 St. Paul Companies, Inc. 88,125 2,800 The Equitable Companies, Inc. 195,300 1,200 Tokio Marine & Fire Insurance Ltd. ADR 68,400 1,100 UNUM Corp. 66,481 ------- - --- 2,068,360 - ------------------------------------------------------------ Machinery--0.2% 1,175 IDEX Corp. 26,805 1,025 JLG Industries, Inc. 16,144 2,075 Lincoln Electric Holdings, Inc.(a) 43,834 575 Milacron, Inc. 11,248 525 Regal Beloit Corp. 12,075 825 Terex Corp.(a) 20,316 ------- - --- 130,422 - ------------------------------------------------------------ Media--0.9% 10,000 CBS Corp.(a) 340,000 3,700 Clear Channel Communications, Inc.(a) 228,937 4,700 Infinity Broadcasting Corp.(a) 130,131 1,175 King World Productions, Inc.(a) 32,166 ------- - --- 731,234 - ------------------------------------------------------------ Metals--0.1% 600 Cleveland-Cliffs, Inc. 24,525 900 Commercial Metals Co. 22,162 450 Kaydon Corp. 15,103 725 RTI International Metals, Inc. 8,972 ------- - --- 70,762 Mining--0.2% 7,200 Freeport-McMoRan Copper & Gold, Inc.(a) $ 68,850 5,900 Newmont Mining Corp. 104,356 ------- - --- 173,206 - ------------------------------------------------------------ Miscellaneous--0.2% 3,125 D.R.Horton, Inc. 66,016 1,000 EG&G Inc. 28,375 725 Franklin Covey Co. 12,053 775 Inacom Corp.(a) 10,123 475 R & B Falcon Corp. 3,355 1,375 Rouse Co. 32,484 350 SEACOR Holdings, Inc. 15,575 375 Tecumseh Products Co. 16,758 ------- - --- 184,739 - ------------------------------------------------------------ Office Equipment & Supplies--0.5% 5,300 Harris Corp. 198,750 625 Kimball International, Inc. Class 'B' Stock 11,016 1,400 Xerox Corp. 173,600 ------- - --- 383,366 - ------------------------------------------------------------ Oil & Gas--1.0% 600 Amerada Hess Corp. 28,500 2,100 Atlantic Richfield Co. 120,487 1,400 BOC Group, PLC, ADR 39,550 975 Devon Energy Corp. 25,533 4,300 Elf Aquitaine SA Corp. (France) 234,887 2,050 Helmerich & Payne, Inc. 36,003 5,900 Newfield Exploration Co.(a) 109,888 2,300 Occidental Petroleum Corp. 34,644 3,200 Oryx Energy Co.(a) 39,000 2,075 Tesoro Petroleum Corp. 22,566 1,500 Total SA, ADR 76,781 ------- - --- 767,839
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 7 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Paper & Packaging--1.4% 725 Ball Corp. $ 32,625 525 Caraustar Industries, Inc. 14,831 1,300 Fort James Corp. 46,638 3,200 Georgia-Pacific Corp. 206,400 2,200 Georgia-Pacific Corp. (Timber Group) 49,500 3,400 International Paper Co. 134,512 4,200 Mead Corp. 120,225 1,500 Rayonier Inc. 66,000 975 Rock-Tenn Co. (Class 'A' Stock) 17,550 2,300 Temple-Inland, Inc. 131,244 1,025 Universal Forest Products, Inc. 20,244 2,700 Weyerhaeuser Co. 146,137 4,600 Willamette Industries, Inc. 161,000 ------- - --- 1,146,906 - ------------------------------------------------------------ Pharmaceuticals--2.2% 300 Alpharma, Inc. 10,388 4,500 American Home Products Corp. 264,094 525 Bindley Western Industry, Inc. 13,256 2,100 Eli Lilly & Co. 196,744 499 Medtronic, Inc. 39,742 1,500 Merck & Co., Inc. 220,125 525 Ocular Sciences, Inc.(a) 12,141 1,800 Pfizer, Inc. 231,525 2,500 Pharmacia & Upjohn, Inc. 143,750 625 Roberts Pharmaceutical Corp. 12,187 5,800 Schering-Plough Corp. 316,100 1,150 Thermoquest Corp.(a) 12,937 3,600 Warner-Lambert Co. 259,875 ------- - --- 1,732,864 - ------------------------------------------------------------ Photography--0.1% 1,700 Eastman Kodak Co. 111,138 - ------------------------------------------------------------ Printing & Publishing--0.1% 300 Consolidated Graphics, Inc. 21,750 775 Hollinger International Inc. 10,172 350 Valassis Communications, Inc.(a) 17,894 600 World Color Press, Inc.(a) 14,775 ------- - --- 64,591 Real Estate Investment Trusts--0.2% 1,425 Franchise Finance Corp. of America $ 32,775 3,500 Glenborough Realty Trust, Inc. 61,469 5,500 MeriStar Hospitality Corp. 105,875 ------- - --- 200,119 - ------------------------------------------------------------ Restaurants--0.8% 4,500 CKE Restaurants, Inc. 106,875 14,900 Darden Restaurants, Inc. 279,375 300 IHOP Corp. 12,900 2,700 McDonald's Corp. 212,794 4,275 Ryan's Family Steak Houses, Inc.(a) 59,048 ------- - --- 670,992 - ------------------------------------------------------------ Retail--2.6% 300 BJ's Wholesale Club, Inc.(a) 13,350 625 Buckle, Inc. 16,719 475 Department 56, Inc. 15,022 6,500 Dillards, Inc. (Class 'A' Stock) 161,281 3,450 Gap, Inc. 221,447 5,600 Home Depot, Inc. 338,100 9,600 IKON Office Solutions, Inc. 153,600 12,500 Kmart Corp.(a) 219,531 4,000 Kohl's Corp.(a) 271,000 3,800 Pep Boys - Manny, Moe & Jack 59,850 2,500 Rite Aid Corp. 122,812 1,100 Ross Stores, Inc. 43,450 1,300 Sears, Roebuck & Co. 52,163 6,000 Staples, Inc.(a) 171,750 4,500 Toys 'R' Us, Inc.(a) 67,500 1,200 Wal-Mart Stores, Inc. 103,200 725 Zale Corp.(a) 23,789 ------- - --- 2,054,564
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 8 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Semiconductors--1.1% 3,300 Applied Materials, Inc.(a) $ 208,519 1,800 Etec Systems, Inc.(a) 96,637 2,200 Intel Corp. 310,062 2,900 KLA Instruments Corp.(a) 167,475 4,600 National Semiconductor Corp. 59,513 ------- - --- 842,206 - ------------------------------------------------------------ Software--1.3% 5,000 Cambridge Technology Partners, Inc.(a) 148,125 875 Check Point Software Technology Ltd.(a) 42,438 650 Dialogic Corp.(a) 16,575 2,200 Documentum, Inc.(a) 51,287 5,200 HNC Software, Inc.(a) 150,150 4,500 I2 Technologies, Inc.(a) 156,937 1,700 Intuit, Inc.(a) 154,700 4,300 Rational Software Corp. 142,169 2,000 VERITAS Software Corp. 167,250 ------- - --- 1,029,631 - ------------------------------------------------------------ Steel - Producers--0.1% 3,225 AK Steel Holding Corp. 67,120 - ------------------------------------------------------------ Telecommunications--2.4% 2,300 AirTouch Communications, Inc.(a) 222,094 2,100 ALLTEL Corp. 135,581 12,500 Aspect Telecommunications Corp.(a) 112,500 1,700 AT&T Corp. 154,275 4,500 Excel Switching Corp. 124,594 7,500 MCI WorldCom, Inc.(a) 598,125 10,500 Natural Microsystems Corp.(a) 71,531 1,300 Nokia Corp. ADR (Sweden)(a) 187,200 2,800 Pacific Gateway Exchange, Inc.(a) 92,750 200 Plantronics, Inc. 16,138 3,000 Qwest Communications International, Inc.(a) 179,812 725 Tekelec, Inc. 14,500 ------- - --- 1,909,100 Tobacco--0.9% 3,400 Loews Corp. $ 286,238 3,900 Philip Morris Co., Inc. 183,300 7,000 RJR Nabisco Holdings Corp. 189,000 1,175 Universal Corp. 35,617 ------- - --- 694,155 - ------------------------------------------------------------ Trucking & Shipping--0.2% 6,000 Air Express International Corp. 113,250 775 US Freightways Corp. 27,028 ------- - --- 140,278 - ------------------------------------------------------------ Utilities--0.7% 1,050 Atmos Energy Corp. 31,303 1,050 BEC Energy Corp. 40,162 2,000 California Water Service Group 52,125 1,375 Calpine Corp.(a) 50,875 550 Cleco Corp. 17,325 825 Conectiv, Inc. 18,563 1,200 GPU, Inc.(a) 51,150 2,000 Houston Industries, Inc. 60,750 1,450 Public Service Company of New Mexico 27,278 275 Rochester Gas & Electric Corp. 7,906 600 TNP Enterprises, Inc. 21,338 2,000 Unicom Corp. 71,250 2,475 Washington Gas Light Co. 59,400 600 WPS Resources Corp. 19,650 ------- - --- 529,075 - ------------------------------------------------------------ Waste Management--0.1% 2,000 Waste Management, Inc. 99,875 ------- - --- Total common stocks (cost $28,273,636) 31,053,257 ------- - ---
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 9 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Principal Moody's Amount Rating (000) Description Value (Note 1) - ------------------------------------------------------------ CORPORATE BONDS--22.6% - ------------------------------------------------------------ Airlines--0.6% Ba2 $ 500 Continental Airlines Inc., Sr. Notes, 8.00%, 12/15/05 $ 491,915 - ------------------------------------------------------------ Audio/Visual--0.6% Ba2 500 Imax Corp., Sr. Notes, 7.875%, 12/1/05 501,875 - ------------------------------------------------------------ Automotive Parts--0.7% B3 500 Hayes Wheels Int'l., Inc., Sr. Sub. Notes, 9.125%, 7/15/07 525,000 - ------------------------------------------------------------ Building Products--0.6% Ba3 500 Building Materials Corp. of America, Sr. Notes, 8.00%, 12/1/08 501,250 - ------------------------------------------------------------ Cable--4.0% B1 500 Adelphia Communications Corp. Sr. Notes, 7.75%, 1/15/09 506,250 B3 500 Avalon Cable, Inc. Sr. Sub. Notes, 9.375%, 12/1/08 525,625 Baa3 2,100 TCI Communications, Inc. Medium Term Notes, 6.46%, 3/6/00 2,128,077 ---- - -------- 3,159,952 - ------------------------------------------------------------ Casinos--0.6% Ba2 500 Harrahs Operating Inc., Gtd. Sr. Sub. Notes, 7.875%, 12/15/05 505,000 Cinema--0.3% B2 $ 250 Carmike Cinemas, Inc. Sr. Sub. Notes, 9.375%, 2/1/09 $ 250,000 - ------------------------------------------------------------ Coal--0.7% Ba3 500 P & L Coal Holdings Corp., Sr. Notes, 8.875%, 5/15/08 516,875 - ------------------------------------------------------------ Communications--0.2% B2 150 Bresnan Communications Group Sr. Notes, 8.00%, 2/1/09 153,000 - ------------------------------------------------------------ Data Processing & Reproduction--0.6% B2 500 Integrated Health Svcs., Inc., Sr. Sub. Notes, Ser. A 9.25%, 1/15/08 470,000 - ------------------------------------------------------------ Fertilizer--0.1% B2 60 Scotts Company, Sr. Sub. Notes, 8.625%, 1/15/09 61,950 - ------------------------------------------------------------ Financial Services--0.6% Aa3 500 Morgan Stanley Group Inc., Global Notes, 5.625%, 1/20/04 497,685 - ------------------------------------------------------------ Industrials--1.0% B2 500 Purina Mills, Inc., Sr. Sub. Notes, 9.00%, 3/15/10 490,000
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 10 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Principal Moody's Amount Rating (000) Description Value (Note 1) - ------------------------------------------------------------ Industrials (cont'd.) B3 $ 500 United Int'l. Holdings, Inc., Sr. Disc. Notes, Zero Coupon (until 2/15/03) 10.75%, 2/15/08 $ 330,625 ---- - -------- 820,625 - ------------------------------------------------------------ Manufacturing--0.7% B1 500 Westinghouse Air Brake Co., Sr. Notes, 9.375%, 6/15/05 520,000 - ------------------------------------------------------------ Media--1.7% B2 500 Ackerly Group, Inc., Sr. Sub. Notes, 9.00%, 1/15/09 520,000 Baa3 200 Seagram Joseph E & Sons, Inc., Sr. Notes, 6.25%, 12/15/01 200,944 Baa3 600 Time Warner, Inc., Ser. 97-1, 6.10%, 12/30/01 610,500 ---- - -------- 1,331,444 - ------------------------------------------------------------ Oil & Gas--1.5% Ba2 500 Gulf Canada Resources Ltd., Sr. Sub. Deb., 9.625%, 7/1/05 510,000 Ba2 750 Petroleos Mexicanos, Gtd. Notes, (Mexico) 9.375%, 12/2/08 712,500 ---- - -------- 1,222,500 - ------------------------------------------------------------ Paper & Packaging--1.3% B1 500 S.D. Warren Co., Sr. Sub. Notes, 12.00%, 12/15/04 542,500 B3 $ 500 Stone Container Corp., Sr. Sub. Deb., 12.75%, 4/1/02 $ 505,000 ---- - -------- 1,047,500 - ------------------------------------------------------------ Printing & Publishing--1.0% B1 500 Mail Well I Corp., Sr. Sub. Notes, 8.75%, 12/15/08 512,500 B3 250 Transwestern Publishing Co., L.P. Sr. Sub. Notes, 9.625%, 11/15/07 261,562 ---- - -------- 774,062 - ------------------------------------------------------------ Real Estate--0.6% Ba2 500 HMH Properties, Inc., Sr. Notes, 8.45%, 12/1/08 500,000 - ------------------------------------------------------------ Restaurants--1.6% B2 250 Advantica Restaurant Group, Inc., Sr. Notes, 11.25%, 1/15/08 257,500 B2 500 Carrols Corp., Sr. Sub. Notes, 9.50%, 12/1/08 506,250 Ba1 500 Felcor Suites LP, Gtd. Sr. Notes, 7.375%, 10/1/04 478,750 ---- - -------- 1,242,500 - ------------------------------------------------------------ Schools--0.2% B3 150 Kindercare Learning Center, Inc., Sr. Sub. Notes, 9.50%, 2/15/09 150,000 - ------------------------------------------------------------ Steel--0.7% B2 500 UCAR Global Enterprises, Inc., Sr. Sub. Notes, 12.00%, 1/15/05 525,000
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 11 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Principal Moody's Amount Rating (000) Description Value (Note 1) - ------------------------------------------------------------ Telecommunications--1.1% B2 $ 300 Intermedia Communications, Inc., Sr. Notes, 8.60%, 6/1/08 $ 288,000 B3 300 Level 3 Communications, Inc., Sr. Disc. Notes, Zero Coupon (until 12/1/03) 10.50%, 12/1/08 177,000 B1 500 Telewest PLC, Sr. Disc. Deb., Zero Coupon (until 10/1/00) 11.00%, 10/1/07 (United Kingdom) 442,500 ---- - -------- 907,500 - ------------------------------------------------------------ Utilities--.9% Ba2 200 Calpine Corp. Sr. Notes, 7.875%, 4/1/08 202,000 CMS Energy Corp. Sr. Notes, Ba3 75 6.75%, 1/15/04 75,000 Ba3 250 7.50%, 1/15/09 257,500 Ba2 200 Niagara Mohawk Power Corp., Sr. Notes, Series C 7.125%, 7/1/01 203,162 ---- - -------- 737,662 - ------------------------------------------------------------ Waste Management--0.6% Ba2 500 Allied Waste North America Corp., Notes, 7.875%, 1/1/09 512,500 ---- - -------- Total corporate bonds (cost $18,617,203) 18,720,275 ---- - -------- ASSET BACKED SECURITIES--1.0% NR $ 800 TMA Mortgage Funding Trust, Asset Backed Notes, 6.25%, 1/25/29 $ 794,480 - ------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS--1.7% Aaa 500 DLJ Mortgage Acceptance Corp. 7.75%, 1/1/21 499,687 NR 862 Residential Funding Mortgage, Inc. Series 1997 S-19, Class A-3 6.50%, 12/25/12 874,017 ---- - -------- Total collateralized mortgage obligations (cost $1,368,492) 1,373,704 ---- - -------- - ------------------------------------------------------------ U.S. GOVERNMENT AGENCIES AND SECURITIES--21.7% 129 Government National Mortgage Assn., 6.625%, 9/20/22 131,540 United States Treasury Bonds, 5,000 14.00%, 11/15/11 7,892,950 2,600 6.00%, 2/15/26 2,853,916 United States Treasury Notes, 3,200 5.375%, 7/31/00 3,233,504 1,200 7.00%, 7/15/06 1,366,500 1,700 3.875%, 1/15/09 1,714,875 ---- - -------- Total U.S. government agencies and securities (cost $17,183,026) 17,193,285 ---- - -------- Total debt obligations (cost $37,168,721) 37,287,264 ---- - -------- Total long-term investments (cost $65,442,357) 68,340,521 ---- - --------
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 12 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------
Principal Moody's Amount Rating (000) Description Value (Note 1) - ------------------------------------------------------------ SHORT-TERM INVESTMENTS--23.2% Commercial Paper--4.8% P-1 $ 1,000 American Information Technologies Corp., 4.76%, 3/5/99 $ 995,769 P-1 800 Du Pont (E. I.) De Nemours & Co., Inc., 4.79%, 2/26/99 797,339 P-1 1,000 IBM Credit Corp., 4.84%, 2/19/99 997,580 P-1 1,000 Shell Oil Company, 4.81%, 2/12/99 998,530 ---- - -------- 3,789,218 - ------------------------------------------------------------ Corporate Bonds--0.6% Ba2 500 Cleveland Electric Illuminating Co., Medium Term Notes, 9.30%, 7/26/99 508,097 - ------------------------------------------------------------ U.S. Goverment Agencies--10.2% 8,000 Government National Mortgage Assn., 6.50%, 12/31/99 (cost $8,000,000) 8,082,500 Principal Amount (000) Description Value (Note 1) - ------------------------------------------------------------ REPURCHASE AGREEMENT--7.6% $ 6,024 Joint Repurchase Agreement Account, 4.72%, 2/1/99 (Note 5) $ 6,024,000 ---- - -------- Total short-term investments (cost $18,318,791) 18,403,815 ---- - -------- - ------------------------------------------------------------ Total Investments--109.3% (cost $83,761,148; Note 4) 86,744,336 Liabilities in excess of other assets--(9.3%) (7,392,127) ---- - -------- Net Assets--100% $ 79,352,209 ---- - -------- ---- - --------
- --------------- (a) Non-income producing security. ADR--American Depository Receipt. LP--Limited Partnership. NR--Not Rated by Moody's or Standard & Poor's The Fund's current Prospectus contains a description of Moody's and Standard & Poor's ratings. - ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 13 Statement of Assets and Liabilities PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------ - --------------------
Assets January 31, 1999 Investments, at value (cost $83,761,148)................................................ .................. $ 86,744,336 Foreign currency, at value (cost $42)........................................................ ............. 41 Cash........................................................ .............................................. 751,397 Receivable for investments sold........................................................ ................... 9,360,235 Receivable for Fund shares sold........................................................ ................... 708,396 Interest and dividends receivable.................................................. ....................... 606,401 Deferred offering costs....................................................... ............................ 78,131 Forward currency contracts - net amount receivable from counterparties.................................... 2,349 - ---------------- Total assets...................................................... ..................................... 98,251,286 - ---------------- Liabilities Payable for investments purchased................................................... ...................... 18,626,114 Accrued expenses and other liabilities................................................. ................... 144,715 Payable for Fund shares reacquired.................................................. ...................... 56,445 Management fee payable..................................................... ............................... 48,795 Distribution fee payable..................................................... ............................. 20,625 Forward currency contracts - net amount payable to counterparties......................................... 2,352 Withholding taxes payable..................................................... ............................ 31 - ---------------- Total liabilities................................................. ..................................... 18,899,077 - ---------------- Net Assets...................................................... .......................................... $ 79,352,209 - ---------------- - ---------------- Net assets were comprised of: Shares of beneficial interest, at par......................................................... ......... $ 7,554 Paid-in capital in excess of par......................................................... .............. 75,719,899 - ---------------- 75,727,453 Undistributed net investment income...................................................... .............. 104,955 Accumulated net realized gain on investments................................................. .......... 536,618 Net unrealized appreciation on investments and foreign currencies...................................... 2,983,183 - ---------------- Net assets, January 31, 1999........................................................ ...................... $ 79,352,209 - ---------------- - ---------------- Class A: Net asset value and redemption price per share ($5,246,048 / 499,529 shares of beneficial interest issued and outstanding)......................... $10.50 Maximum sales charge (5% of offering price)...................................................... ...... .55 - ---------------- Maximum offering price to public...................................................... ................. $11.05 - ---------------- - ---------------- Class B: Net asset value, offering price and redemption price per share ($14,315,369 / 1,363,790 shares of beneficial interest issued and outstanding)...................... $10.50 - ---------------- - ---------------- Class C: Net asset value and redemption price per share ($11,781,577 / 1,122,369 shares of beneficial interest issued and outstanding)...................... $10.50 Sales charge (1% of offering price)...................................................... .............. .11 - ---------------- Offering price to public...................................................... ......................... $10.61 - ---------------- - ---------------- Class Z: Net asset value, offering price and redemption price per share ($48,009,215 / 4,567,816 shares of beneficial interest issued and outstanding)...................... $10.51 - ---------------- - ----------------
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 14 PRUDENTIAL DIVERSIFIED FUNDS PRUDENTIAL CONSERVATIVE GROWTH FUND Statement of Operations (Unaudited) - ------------------------------------------------------------
November 18, 1998(a) Through Net Investment Income January 31, 1999 Income Interest............................ $ 569,708 Dividends (net of foreign withholding taxes of $31)........ 54,973 ----------- Total income..................... 624,681 ----------- Expenses Management fee...................... 109,759 Distribution fee--Class A........... 1,724 Distribution fee--Class B........... 20,947 Distribution fee--Class C........... 19,813 Custodian's fees and expenses....... 55,000 Reports to shareholders............. 20,000 Amortization of offering cost....... 19,868 Registration fees................... 19,000 Audit fee and expenses.............. 12,500 Legal fees.......................... 9,000 Transfer agent's fees and expenses......................... 3,000 Trustees' fees and expenses......... 2,000 Miscellaneous....................... 3,699 ----------- Total expenses................... 296,310 ----------- Net investment income.................. 328,371 ----------- Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions Net realized gain on: Investment transactions............. 535,574 Foreign currency transactions....... 1,044 ----------- 536,618 ----------- Net unrealized appreciation (depreciation) on: Investments......................... 2,983,188 Foreign currencies.................. (5) ----------- 2,983,183 ----------- Net gain on investments................ 3,519,801 ----------- Net Increase in Net Assets Resulting from Operations $3,848,172 ----------- -----------
- --------------- (a) Commencement of investment operations. PRUDENTIAL DIVERSIFIED FUNDS PRUDENTIAL CONSERVATIVE GROWTH FUND Statement of Changes in Net Assets (Unaudited)
November 18, 1998(a) Increase (Decrease) In Through Net Assets January 31, 1999 Operations Net investment income................... $ 328,371 Net realized gain on investment and foreign currency transactions........ 536,618 Net unrealized appreciation of investments and foreign currencies... 2,983,183 --------------- - ----- Net increase in net assets resulting from operations...................... 3,848,172 --------------- - ----- Dividends from net investment income (Note 1) Class A.............................. (12,004) Class B.............................. (25,001) Class C.............................. (23,526) Class Z.............................. (162,885) --------------- - ----- (223,416) --------------- - ----- Fund share transactions (net of share conversions) (Note 6) Net proceeds from shares sold........... 78,815,675 Net asset value of shares issued in reinvestment of dividends............ 219,247 Cost of shares reacquired............... (3,337,469) --------------- - ----- Net increase in net assets from Fund share transactions................... 75,697,453 --------------- - ----- Total increase............................. 79,322,209 Net Assets Beginning of period........................ 30,000 --------------- - ----- End of period(b)........................... $ 79,352,209 --------------- - ----- --------------- - ----- - --------------- (a) Commencement of investment operations. (b) Includes undistributed net investment income of............................ $ 104,955 --------------- - -----
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 15 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------ - -------------------- Prudential Diversified Funds (the 'Trust') is registered under the Investment Company Act of 1940, as an open-end, diversified management investment company presently consisting of three Portfolios: Prudential Diversified Conservative Growth Fund (the 'Fund'), Prudential Diversified Moderate Growth Fund and Prudential Diversified High Growth Fund. The Trust was organized as a business trust in Delaware on October 24, 1997. The Fund had no significant operations other than the issuance of 750 shares each of Class A, Class B, Class C and Class Z shares of beneficial interest for $30,000 on September 2, 1998 to Prudential Investments Fund Management LLC ('PIFM'). The Fund commenced investment operations on November 18, 1998. The investment objective of the Fund is to seek to provide current income and a reasonable level of capital appreciation. The Fund seeks to achieve its investment objective by investing in a diversified portfolio of debt obligations and equity securities. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry or country. - ------------------------------------------------------------ Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund and the Series in the preparation of its financial statements. Securities Valuation: Securities for which the primary market is on an exchange and NASDAQ National Market Securities are valued at the last sales price on such exchange 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 or principal market maker. U.S. Government securities for which market quotations are available shall be valued at a price provided by an independent pricing agent or broker-dealer. Privately placed securities including equity securities for which market prices may be obtained from primary dealers shall be valued at the bid prices provided by such primary dealers. Securities for which market quotations are not readily available, may be valued using the last available market quotation for a period not to exceed five days, provided the Manager and Subadvisor feel this is representative of market value, afterwards, such securities are valued in good faith under procedures adopted by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. In connection with transactions in repurchase agreements with U.S. financial institutions, it is the Fund's policy that its custodian or designated subcustodians, as the case may be under triparty repurchase agreements, take possession of the underlying securities, the value of which exceeds the principal amount of the repurchase transaction including accrued interest. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited. All securities are valued as of 4:15 p.m., New York time. Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) market value of investment securities, other assets and liabilities - at the closing daily rates of exchange. (ii) purchases and sales of investment securities, income and expenses - at the rate of exchange prevailing on the respective dates of such transactions. Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the fiscal period, the Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities held at the end of the period. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of long-term portfolio securities sold during the period. Accordingly, these realized foreign currency gains (losses) are included in the reported net realized gains (losses) on investment transactions. Net realized gains on foreign currency transactions represent net foreign exchange gains or losses from holdings of foreign currencies, currency gains or losses realized between the trade and settlement dates on security transactions, and the difference between the amounts of dividends, interest and foreign taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains or losses from valuing foreign currency denominated assets and liabilities (other than investments) at fiscal period end exchange rates are - ------------------------------------------------------------ - -------------------- 16 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------ - -------------------- reflected as a component of net unrealized appreciation on investments and foreign currencies. Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin as a result of, among other factors, the possibility of political and economic instability and the level of governmental supervision and regulation of foreign securities markets. Forward Currency Contracts: A forward currency contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The Fund enters into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings or on specific receivables and payables denominated in a foreign currency. The contracts are valued daily at current exchange rates any unrealized gain or loss is included in net unrealized appreciation or depreciation on investments. Gain or loss is realized on the settlement date of the contract equal to the difference between the settlement value of the original and renegotiated forward contracts. This gain or loss, if any, is included in net realized gain (loss) on foreign currency transactions. Risks may arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses from investment and currency transactions are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date; interest income is recorded on the accrual basis. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Net investment income (loss), other than distribution fees, and 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: The Fund expects to pay dividends of net investment income quarterly, and distributions of net realized capital and currency gains, if any, 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: For federal income tax purposes, each Fund in the Trust is treated as a separate taxpaying entity. It is the intent of the Fund to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to 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 Offering Cost: The Fund incurred approximately $98,000 in connection with the initial offering of the Fund. Offering costs are being amortized over a period of 12 months ending November 1999. - ------------------------------------------------------------ Note 2. Agreements The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM manages the investment operations of the Fund, administers the Fund's affairs and supervises the subadviser's performance of all investment advisory services. PIFM pays for the costs pursuant to the advisory agreements, the cost of compensation of officers of the Fund, occupancy and certain clerical and accounting 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 .75% of the average daily net assets of the Fund. PIFM, in turn, pays each adviser a fee, computed daily and paid monthly, equal to the annual rate specified below based on the average daily net assets of the Fund segments they manage.
Fee Paid By PIFM Advisers to Advisers - ------------------------------ -------------------------- - ------- Jennison Associates LLC .30% with respect to the first $300 million; .25% for amounts in excess of $300 million The Prudential Investment N/A1 Corporation Pacific Investment Management .25% Company Franklin Advisers, Inc. .50% The Dreyfus Corporation .45% 1Under the Advisory Agreement between PIFM and PIC. PIC is reimbursed by PIFM for its reasonable costs and expenses.
The Fund has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Class A, Class B, Class C and Class Z shares of the Fund. The Fund compensates PIMS for distributing and servicing the Fund's Class A, Class B and - ------------------------------------------------------------ - -------------------- 17 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------ - -------------------- Class C shares, pursuant to plans of distribution, (the 'Class A, B and C plans'), regardless of expenses actually incurred by PIMS. The distribution fees are accrued daily and payable monthly. No distribution or service fees are paid to PIMS as distributor for Class Z shares of the Fund. Pursuant to the Class A, B and C Plans, the Fund compensates 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 period ended January 31, 1999. PIMS has advised the Fund that it has received approximately $49,600 in front-end sales charges resulting from sales of Class A and Class C shares during the period ended January 31, 1999. PIMS has advised the Fund that for the period ended January 31, 1999, it has received approximately $200 and $100 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PIMS, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential Insurance Company of America. The Trust, 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 period ended January 31, 1999. 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 February 28, 1999 and has been extended through March 12, 1999 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 Trust's transfer agent. During the period ended January 31, 1999, the Fund incurred fees of approximately $2,900 for the services of PMFS. As of January 31, 1999 approximately $1,700 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. Note 4. Portfolio Securities Purchases and sales of portfolio securities, excluding short- term investments, for the period ended January 31, 1999 were $100,684,530 and $27,247,659, respectively. At January 31, 1999, the Fund had an outstanding forward currency contract to purchase foreign currency as follows:
Value at Foreign Currency Settlement Date Current Purchase Contracts Payable Value Depreciation - ---------------------------------- --------------- ------ - - --------------- Pound-Sterling, expiring 3/31/99................. $ 2,353 $2,349 $ (4) ----- ------ - - --- ----- ------ - - ---
The United States federal income tax basis of the Funds' investments as of January 31, 1999 was substantially the same as for financial reporting purposes and accordingly, net unrealized appreciation on investments for federal income tax purposes was $2,983,188 (gross unrealized appreciation-- $4,467,785, gross unrealized depreciation--$1,481,597). - ------------------------------------------------------------ Note 5. Joint Repurchase Agreement Account The Fund, along with other affiliated registered investment companies, transfers uninvested cash balances into a single joint account, the daily aggregate balance of which is invested in one or more repurchase agreements collateralized by U.S. Treasury or federal agency obligations. As of January 31, 1999, the Fund had a 0.8% undivided interest in the repurchase agreements in the joint account. The undivided interest for the Fund represents $6,024,000 in principal amount. As of such date, each repurchase agreement in the joint account and the collateral therefore were as follows: Bear, Stearns & Co. Inc., 4.75%, in the principal amount of $200,000,000 repurchase price $200,079,167, due 2/1/99. The value of the collateral including accrued interest was $206,615,704. J.P. Morgan Inc., 4.72%, in the principal amount of $200,000,000, repurchase price $200,078,667, due 2/1/99. The value of the collateral including accrued interest was $204,000,313. Salomon Smith Barney Inc., 4.73%, in the principal amount of $200,000,000, repurchase price $200,078,883, due 2/1/99. The value of the collateral including accrued interest was $204,209,880. Warburg Dillon Read LLC, 4.62%, in the principal amount of $80,255,000, repurchase price of $80,285,898, due 2/1/99. The value of the collateral including accrued interest was $81,862,553. - ------------------------------------------------------------ - -------------------- 18 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------ - -------------------- Note 6. Capital The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 5%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Class B shares automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. A special exchange privilege is also available for shareholders who qualified to purchase Class A shares at net asset value. Class Z shares are not subject to any sales or redemption charge and are offered exclusively for sale to a limited group of investors. Of the 7,553,504 shares of beneficial interest issued and outstanding at January 31, 1999, Prudential owned 4,718,590. The Fund has authorized an unlimited number of shares of beneficial interest at $.001 par value. Transactions in shares of beneficial interest were as follows:
Class A Shares Amount - ---------------------------------- ----------- --------- - ---- November 18, 1998(a) through January 31, 1999: Shares sold....................... 519,735 $ 5,263,736 Shares issued in reinvestment of dividends....................... 1,147 11,758 Shares reacquired................. (22,883) (234,295) ----------- --------- - ---- Net increase in shares outstanding before conversion............... 497,999 5,041,199 Shares issued upon conversion..... 780 7,855 ----------- --------- - ---- Net increase in shares outstanding..................... 498,779 $ 5,049,054 ----------- --------- - ---- ----------- --------- - ---- Class B Shares Amount - ---------------------------------- ----------- --------- - ---- November 18, 1998(a) through January 31, 1999: Shares sold....................... 1,398,105 $ 14,148,535 Shares issued in reinvestment of dividends....................... 2,246 23,026 Shares reacquired................. (36,531) (373,767) ----------- --------- - ---- Net increase in shares outstanding before conversion............... 1,363,820 13,797,794 Shares reacquired upon conversion...................... (780) (7,855) Net increase in shares outstanding..................... 1,363,040 $ 13,789,939 ----------- --------- - ---- ----------- --------- - ---- Class C - ---------------------------------- November 18, 1998(a) through January 31, 1999: Shares sold....................... 1,141,888 $ 11,494,804 Shares issued in reinvestment of dividends....................... 2,108 21,604 Shares reacquired................. (22,377) (229,008) ----------- --------- - ---- Net increase in shares outstanding..................... 1,121,619 $ 11,287,400 ----------- --------- - ---- ----------- --------- - ---- Class Z - ---------------------------------- November 18, 1998(a) through January 31, 1999: Shares sold....................... 4,790,679 $ 47,908,600 Shares issued in reinvestment of dividends....................... 15,889 162,859 Shares reacquired................. (239,502) (2,500,399) ----------- --------- - ---- Net increase in shares outstanding..................... 4,567,066 $ 45,571,060 ----------- --------- - ---- ----------- --------- - ----
- --------------- (a) Commencement of investment operations. - ------------------------------------------------------------ - -------------------- 19 PRUDENTIAL DIVERSIFIED FUNDS Financial Highlights (Unaudited) PRUDENTIAL CONSERVATIVE GROWTH FUND - ------------------------------------------------------------ - --------------------
November 18, 1998(a) Through January 31, 1999 - ------------------------------------------- Class A Class B Class C Class Z - ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period........................................ $10.00 $ 10.00 $ 10.00 $ 10.00 - ------- ------- ------- ------- Income from investment operations: Net investment income...................................................... . .02 .02 .02 .02 Net realized and unrealized gain on investments and foreign currencies...... .51 .50 .50 .52 - ------- ------- ------- ------- Total from investment operations......................................... .53 .52 .52 .54 - ------- ------- ------- ------- Less distributions Dividends from net investment income........................................ (.03 ) (.02) (.02) (.03) - ------- ------- ------- ------- Net asset value, end of period.............................................. $10.50 $ 10.50 $ 10.50 $ 10.51 - ------- ------- ------- ------- - ------- ------- ------- ------- TOTAL RETURN(b)................................................... .......... 5.33 % 5.25% 5.25% 5.45% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)............................................. $5,246 $14,315 $11,782 $48,009 Average net assets (000).................................................... $2,718 $ 8,860 $ 9,015 $48,404 Ratios to average net assets:(c) Expenses, including distribution fees.................................... 1.98% 2.73% 2.73% 1.73% Expenses, excluding distribution fees.................................... 1.73% 1.73% 1.73% 1.73% Net investment income.................................................... 2.28% 1.53% 1.53% 2.53% Portfolio turnover rate..................................................... 40% 40% 40% 40%
- --------------- (a) Commencement of investment operations. (b) Total return does not consider the effect of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total return for periods of less than a full year are not annualized. (c) Annualized. - ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 20 Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 http://www.prudential.com Trustees Eugene C. Dorsey Douglas H. McCorkindale Thomas T. Mooney Officers Robert F. Gunia, President Grace C. Torres, Treasurer Stephen M. Ungerman, Assistant Treasurer David F. Connor, Secretary Manager Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Investment Sub-Advisers The Prudential Investment Corporation Prudential Plaza Newark, NJ 07102-3777 Jennison Associates LLC 466 Lexington Avenue New York, NY 10017 Franklin Advisers, Inc. 777 Mariners Island Blvd. San Mateo, CA 94404 The Dreyfus Corporation 200 Park Avenue New York, NY 10166 Pacific Investment Management Company 840 Newport Center Drive Newport Beach, CA 92660 Distributor Prudential Investment Management Services LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Custodian State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 Transfer Agent Prudential Mutual Fund Services LLC Raritan Plaza One Edison, NJ 08837 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Legal Counsel Kirkpatrick & Lockhart LLP 1800 Massachusetts Ave., N.W. Washington, DC 20036 The views expressed in this report and information about the Fund's portfolio holdings are for the period covered by this report and are subject to change thereafter. The accompanying financial statements as of January 31, 1999 were not audited and, accordingly, no opinion is expressed on them. This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. (LOGO) Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 74432F109 74432F208 MF186E6 74432F307 74432F406 Prudential Diversified FundsSM (ICON) Prudential Diversified Moderate Growth Fund SEMI ANNUAL REPORT Jan. 31, 1999 (LOGO) Prudential Diversified Moderate Growth Fund Performance At A Glance. In the short time since the inception of the Prudential Diversified Moderate Growth Fund on November 18, 1998, the importance of diversification was very evident. Returns of two popular styles of stock investing -- value and growth -- diverged considerably over this period in the stocks of both large and small companies. Investors strongly preferred growth companies, particularly large familiar ones. Our performance was helped during this period by our growth stock holdings. We performed in line with the Lipper Growth and Income Index, even though we hold about 35% of our assets in bonds, while most funds in the Index have little or no bond holdings. Cumulative Total Returns1 As of 1/31/99
Since Since Inception2 Inception2 (Without Sales Charge) (With Sales Charge) Class A 6.96% 1.62% Class B 6.79 1.79 Class C 6.79 4.72 Class Z 7.01 7.01 Lipper Growth & Income Fund Avg.3 6.24 N/A
Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1 Source: Prudential Investments Fund Management and Lipper, Inc. Since the Fund has been in existence less than one year, no average annual total returns are presented. The Fund charges a maximum front-end sales charge of 5% for Class A shares. Class B shares are subject to a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically convert to Class A shares, on a quarterly basis, approximately seven years after purchase. Class C shares are subject to a front- end sales charge of 1% and a CDSC of 1% for 18 months. Class Z shares are not subject to a sales charge or distribution fee. 2 Inception dates: Class A, B, C, and Z, 11/18/98. 3 The Lipper Since Inception return is for all funds in each share class. Investment Advisers' Report Prudential Investments Fund Management LLC - -John Van Belle, Ph.D. - -Stacie Mintz Sub-Advisers The Dreyfus Corporation Franklin Advisers, Inc. Jennison Associates LLC Lazard Asset Management Pacific Investment Management Company The Prudential Investment Corporation The Fund seeks to provide capital appreciation and a reasonable level of current income. It invests in a diversified portfolio of stocks and bonds. There can be no assurance that the Fund will achieve its investment objective. Moderate Growth Fund Diversification Target (PIE CHART) Diversification -- spreading your investments over many different securities -- is a basic principle of investing. It helps to reduce the overall risk of your portfolio. Moreover, when we rebalance our portfolio to restore the original weighting of different asset classes, the discipline forces us to sell high and buy low. Over time, this may improve your return. What Is Diversification? Diversification -- This is how diversification works: Mutual funds not only provide professional money management, they also allow a relatively small investment to be spread over many different securities. When you own a large number of different securities, the impact of any one on your return is reduced. In addition, if you diversify your investments among asset classes and investment styles -- between stocks and bonds, large-cap stocks and small-/mid-cap stocks, value and growth styles, and investment grade and high yield bonds -- it is less likely that all the securities you own will move in the same direction at one time. The Prudential Diversified Funds provide more of this buffering than a fund investing in only one asset class. We believe this will result in smoother returns over time. Rebalancing -- The Diversified Moderate Growth Fund has a target balance of the various asset classes. As some perform better than others, the portfolio will drift from this original balance: the securities that rise most will become a larger proportion of the invested assets. We direct new investments to the asset classes that have fallen below their target ratio and, when necessary, sell appreciated securities to maintain the balance. This not only keeps your risk exposure from changing too much, but it may reduce the average cost of our investments and increase our average selling price over time. Although an individual investor can diversify and rebalance, it would require a large investment to own the range of asset classes represented in the Prudential Diversified Moderate Growth Fund. Moreover, calculating the amounts to allocate to each kind of security in a rebalancing would be difficult. Prudential Diversified Funds do it all for you. Asset classes are classifications of investments. The most basic distinction among securities is among stocks, bonds, and money market investments. Stocks are shares of ownership in a firm. Owners share in the profits, after debts are paid, and share in the firm's appreciation in value. Generally, the prices of stocks vary with investors' estimates of a firm's earning prospects, including the impact of broader economic conditions. Bonds are loans to a company, government, or agency. They carry a fixed interest rate or one that varies according to a rule that is specified in the bond. They have a maturity date at which they must be repaid. Generally, bond prices vary with current interest rates for new bonds and with changes in the debtor's prospects of repaying the loan. Money market instruments are very short-term loans, 13 months or less. Bonds and money market instruments are called fixed-income securities. The Economic Context. At the time we opened the Prudential Diversified Funds in November 1998, global financial markets had been unsettled first by an economic recession in Asia and then by debt defaults in Russia and China. Both stock and bond prices had fallen sharply, except for United States Treasury bonds, which increased in price as investors tried to avoid any risk at all. In response to the turmoil, European central banks reduced interest rates to reassure investors about European economic growth and the U.S. Federal Reserve Bank made the dramatic move of reducing rates three times within a two-month period. (Lower interest rates are expected to stimulate economic activity.) Lower interest rates mean higher bond prices for older bonds because they provide a larger stream of interest payments. U.S. stock markets began to climb again in October, rebounding from their earlier fall. This was the setting for our initial investments in mid-November. Early in 1999, it became clearer that the U.S. economy was growing rapidly, but concerns about Europe continued. Brazil devalued its currency -- raising the prices of all imported goods for Brazilians -- and slipped into a recession that threatened to spread to its Latin American trading partners. There were signs of economic stabilization in Asia. Japan's economy has been contracting, despite the Japanese government's announcements of steps to reform and revive its economy. The Financial Markets. Investors continued to feel insecure despite the market bounce, so stock market advances in the United States were focused on the very largest growth companies. A standard benchmark for U.S. large-cap stocks is the S&P 500 Index. The S&P 500 rose 12% during our reporting period -- November 18, 1998 through the end of January 1999 -- while the stocks of smaller companies rose only 9% (measured by the Russell 2000 Small-Cap Index). Growth & Value. Growth-style stocks also were significantly favored over value stocks in all market-cap sectors. In the large caps, growth stocks returned 16%, while value stocks returned only 8%. Among small caps, the difference was even more marked. These differences were generally due to the strong performance of a few of the larger growth-style stocks, while most other stocks languished. The concentration United States Treasury bonds are backed by the full faith and credit of the U.S. government, so investors view them as among the safest investments. Because of their safety, they generally carry a lower yield than corporate or foreign government bonds. When investors are more fearful, the demand for these safest of all securities increases and their price rises, while other bonds generally fall in value. A decline in value makes the bond's fixed interest payments amount to a higher yield on its purchase price. A currency devaluation is a decline in purchasing power compared to currencies of other countries. One way that can happen is if a country that has been maintaining some control over its exchange rate, such as Brazil, changes its policy. The result is a sharp increase in inflation for the Brazilian people and a loss of purchasing power. Moreover, Brazilian borrowers will find it much harder to raise enough cash in local currency to service debt denominated in foreign currencies. Market capitalization -- shortened to "market cap" -- is what it would cost to buy all of a company's stock at the current market price. It is calculated by multiplying the price of a share of stock by the number of outstanding shares. Often it is spoken of as the value the market is putting on the entire company. Although it is often used to represent the size of the company, market cap is strongly affected by the demand for the firm's stock and is not closely tied to other measures of size, such as number of employees, earnings, or book value. Continued... 1 The Financial Markets Cont'd of performance was unusually tightly focused, a sign that investors were sticking to the most familiar companies. International. Over the same period, international stocks averaged a 6% return, as measured by the Morgan Stanley EAFE (Europe, Australasia, and the Far East) Index. The advance came mostly in the three weeks ending January 8, 1999, with a great deal of market volatility around it. The Pacific region was recovering from a steep plunge over the prior two years. Although the European return also was substantial for such a short period, it trailed the world average slightly. It also represented a sharp bounce from its more brief and shallow decline in the summer of 1998. Bonds. Bond returns generally were much more modest over this period -- one to two percentage points. It is worth mentioning that when stock markets around the world plunged in August 1998, bonds were an important stabilizing factor. Although they also fell, they fell much less than stocks. Similarly, when U.S. stock markets dropped in February 1999, after our reporting period ended, bonds again were a stabilizing factor. Two popular stock investment styles are growth and value. Growth managers look among the most rapidly growing companies for those with the best long-term prospects, while value managers look among neglected and inexpensive companies for those with the best earnings prospects or asset values for the dollar. Historically, at any given time one style has worked better than the other, but they alternate in periods of superior performance. Our Performance. The return on our bonds, both core fixed-income and high yield bonds, was modest compared with that on our stocks over our reporting period. Of the asset and style classes in our Fund, only the large-cap value stocks performed worse. Our target allocation of 35% bonds constrained our overall return, which nonetheless was close to our Lipper Growth and Income Fund Average benchmark. Although few of the other funds in that category hold bonds, the strong performance of our large-cap growth stocks compensated for our lower-return assets. Portfolio managers who follow a disciplined approach are clearly focused on what they are looking for; we believe that they will generally perform better over the long term than less methodical investors. However, no one investment style is superior in all markets. Consequently, our stocks are divided into portions to be invested in a value and in a growth style. Our growth stocks were tightly focused on companies with above-average current and projected earnings growth. In a market that strongly favored that style, they performed even better than the growth-stock average by a substantial margin. They had a focus on the technology and health-care sectors, which were market favorites. Our value stocks also were invested in a very disciplined manner, and they suffered more than most in an environment hostile to their style. As we hoped, however, our winners were ahead of the average by a much greater margin than our value stocks trailed. In all the other asset classes, our holdings performed about in line with their benchmarks. 2 A Message to Our Shareholders March 26, 1999 (PHOTO) Dear Shareholder, When I think about how Prudential's clients can benefit from their investments, one of my recent concerns is how misleading today's equity markets have become. Major index advances continue to be driven by the stocks of a handful of very large companies. These stocks are getting more and more expensive, out of proportion to their earnings expectations. As a result, a substantial disparity in value continues to grow between large and small companies and between growth and value stocks. Since not all stocks are benefiting from the highly publicized euphoria surrounding each record-breaking milestone, it is unlikely that these trends will continue. In fact, history shows that markets generally bring prices in line with earnings performance sooner or later. Diversification Is Critical. Instead of chasing recent market winners, investors should have a well-diversified asset allocation strategy in place and keep to it. It is also a good practice to rebalance your holdings when necessary to keep your asset allocation consistent with your long-term objectives and risk tolerance. A properly diversified portfolio of value- and growth-oriented mutual funds, bond funds and money market funds could help you weather inevitable market turbulence and receive more consistent returns over time. Prudential offers a wide range of mutual funds to help our shareholders diversify. Thank you for your continued confidence in Prudential mutual funds. Sincerely, John R. Strangfeld Chief Investment Officer Prudential Investments 3 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) -------------------------------------------------------- - ---- LONG-TERM INVESTMENTS--90.7% COMMON STOCKS--61.7% -------------------------------------------------------- - ---- Advertising--0.3% 7,000 Cambridge Technology Partners, Inc.(a) $ 207,375 325 Catalina Marketing Corp.(a) 21,694 ------- - --- 229,069 - ------------------------------------------------------------ Aerospace/Defense--0.7% 27,800 British Aerospace PLC (United Kingdom)(a) 211,138 400 Cordant Technologies, Inc. 12,700 7,700 Loral Space & Communications, Inc. 169,400 1,500 Raytheon Co. (Class 'A' Stock) 83,625 1,400 Raytheon Co. (Class 'B' Stock) 78,313 ------- - --- 555,176 - ------------------------------------------------------------ Airlines--0.4% 1,250 Alaska Air Group, Inc.(a) 62,969 1,800 Continental Airlines, Inc.(a) 61,425 8,500 Mesaba Holdings, Inc.(a) 170,000 ------- - --- 294,394 - ------------------------------------------------------------ Aluminum & Steel--0.5% 4,875 AK Steel Holding Corp. 101,461 2,100 Alcoa, Inc. 175,612 2,900 Reliance Steel & Aluminum Co. 79,388 ------- - --- 356,461 - ------------------------------------------------------------ Apparel--0.5% 450 American Eagle Outfitters, Inc. 30,769 1,575 Kellwood Co. 43,706 4,500 Tropical Sportswear Intl., Corp.(a) 152,438 14,000 Wolverine World Wide, Inc. 154,875 ------- - --- 381,788 Audio/Visual--0.1% 1,400 Sony Corp. (Japan) $ 101,693 - ------------------------------------------------------------ Auto & Truck--1.2% 1,425 Arvin Industries, Inc. 56,377 1,300 Borg-Warner Automotive, Inc. 62,562 1,210 Daimlerchrysler AG (Germany) 126,141 67,800 Lucas Varity PLC (United Kingdom) 323,578 16,000 Nissan Motor Co., Ltd.(a) (Japan) 57,767 500 Safeskin Corp. 11,688 11,000 Safety Kleen Corp. 166,375 1,500 Varlen Corp. 36,000 2,700 Volvo AB, Ser. B (Sweden) 73,540 ------- - --- 914,028 - ------------------------------------------------------------ Banking--4.3% 1,750 BancorpSouth, Inc. 30,078 5,700 Bank of New York Co., Inc. 202,350 500 Bank United Corp. (Class 'A' Stock) 20,000 4,400 BankAmerica Corp. 294,250 675 Banknorth Group, Inc. 20,166 1,740 Banque Nationale de Paris (France) 158,151 8,600 Chase Manhattan Corp. 661,662 775 City National Corp. 26,786 3,100 Commercial Federal Corp. 70,913 5,680 Corporacion Bancaria de Espana (Spain) 145,677 425 CORUS Bankshares, Inc. 14,450 1,825 Cullen/Frost Bankers, Inc. 94,786 2,010 CVB Financial Corp. 38,944 150 First Citizens BancShares, Inc. (Class 'A' Stock) 13,238 8,500 Golden State Bancorp, Inc.(a) 158,844 1,025 Harbor Florida Bancshares, Inc. 11,403 3,200 HSBC Holdings PLC (Hong Kong)(a) 79,701
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 4 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Banking (cont'd.) 600 ING Groep N.V. (Netherlands) $ 34,992 2,075 MAF Bancorp, Inc. 50,319 6,900 Merita PLC, Series A (Finland) 44,320 7,400 National Westminster Bank PLC (United Kingdom)(a) 136,152 6,700 Nordbanken Holding AB (Sweden) 46,373 1,900 North Fork Bancorporation, Inc. 39,900 3,275 Peoples Heritage Financial Group, Inc. 58,950 625 Queens County Bancorp., Inc. 19,805 1,100 Republic New York Corp. 40,288 9,600 Sao Paolo Imi SpA (Italy) 156,612 1,050 St. Paul Bancorp, Inc. 24,281 19,000 Sumitomo Trust & Banking Co., Ltd. (Japan) 52,428 2,520 Svenska Handelsbanken, Series A (Sweden) 100,129 1,220 Unidanmark AS (Denmark) 101,637 13,000 United Overseas Bank, Ltd. (Singapore) 77,623 1,000 Washington Federal, Inc. 25,688 4,100 Washington Mutual, Inc. 172,200 1,825 Westamerica Bancorporation 64,217 10,700 Westpac Banking Corp. (Australia) 74,074 ------- - --- 3,361,387 - ------------------------------------------------------------ Building & Construction--1.5% 8,300 ABB AB, Ser. A (Sweden) 81,384 2,300 American Standard Companies, Inc.(a) 79,062 3,000 Centex Corp. 129,562 870 Compagnie De Saint Gobain (France) 121,852 4,800 D.R. Horton, Inc. 101,400 2,900 Lone Star Industries, Inc. 106,575 1,675 M.D.C. Holdings, Inc. 35,175 4,425 Pulte Corp. 133,580 1,275 Southdown, Inc. 70,842 1,900 Thomas Industries, Inc. 34,913 4,075 Toll Brothers, Inc.(a) 93,725 2,575 U.S. Home Corp.(a) $ 91,413 4,275 Webb Delaware Corp. 111,150 ------- - --- 1,190,633 - ------------------------------------------------------------ Cable--0.2% 5,000 Jones Intercable, Inc.(a) 180,000 - ------------------------------------------------------------ Chemicals--0.7% 1,400 Dow Chemical Co. 123,287 2,100 Eastman Chemical Co. 85,312 2,550 Gencorp, Inc. 59,606 3,100 Hoechst AG (Germany) 133,216 10,500 Imperial Chemical Industries PLC (United Kingdom) 94,521 1,300 Spartech Corp. 31,038 ------- - --- 526,980 - ------------------------------------------------------------ Computers--4.6% 5,000 Aspect Development, Inc.(a) 144,375 5,900 Cadence Design Systems, Inc.(a) 188,800 925 Citrix Systems, Inc.(a) 83,828 13,100 Compaq Computer Corp. 623,887 3,500 Dell Computer Corp.(a) 350,000 6,500 Hewlett-Packard Co. 509,437 1,700 International Business Machines Corp. 311,525 3,400 Microsoft Corp.(a) 595,000 1,500 Neomagic Corp.(a) 21,094 8,700 Oracle Systems Corp.(a) 481,762 350 SCM Microsystems, Inc. 27,563 7,400 Seagate Technology, Inc.(a) 301,088 ------- - --- 3,638,359
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 5 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Computer Services--3.0% 6,000 3Com Corp.(a) $ 282,000 4,600 Affiliated Computer Services, Inc.(a) 221,950 1,700 Ascend Communications, Inc.(a) 148,431 4,400 Autodesk, Inc. 194,425 4,900 Cisco Systems, Inc.(a) 546,656 625 Computer Task Group, Inc. 16,367 1,475 Hypercom Corp. 18,899 11,300 Platinum Technology, Inc.(a) 149,725 4,800 Symbol Technologies, Inc. 302,400 9,000 Xylan Corp.(a) 182,250 ------- - --- 2,063,103 - ------------------------------------------------------------ Consumer Products--1.6% 5,000 Avon Products, Inc. 184,688 875 Fossil, Inc. 25,949 1,200 Hitachi Ltd. ADR 85,950 2,550 Mikasa, Inc. 29,007 1,530 Siemens AG (Germany) 108,798 6,300 Tandy Corp. 340,200 3,600 Texas Instruments, Inc. 355,950 8,600 Unilever PLC (United Kingdom) 85,272 ------- - --- 1,215,814 - ------------------------------------------------------------ Distribution/Wholesalers--0.2% 9,000 Brightpoint, Inc. 157,500 625 Ingram Micro, Inc. 18,945 ------- - --- 176,445 Diversified Manufacturing--0.8% 29,200 BTR Siebe PLC (United Kingdom) $ 98,992 800 Crane Co. 21,750 1,500 CUNO, Inc.(a) 21,000 4,500 General Electric Co. 471,937 1,300 SPS Technologies, Inc.(a) 63,944 40 Swatch Group (Switzerland)(a) 21,641 ------- - --- 699,264 - ------------------------------------------------------------ Diversified Operations--0.2% 8,200 Granada Group PLC (United Kingdom) 146,485 - ------------------------------------------------------------ Electrical Utilities--0.6% 1,600 BEC Energy 61,200 2,150 Calpine Corp. 79,550 875 Cleco Corp. 27,563 1,275 Conectiv, Inc. 28,687 4,020 Endesa SA (Spain) 111,923 1,800 Public Service Company of New Mexico 33,863 350 Rochester Gas & Electric Corp. 10,063 900 TNP Enterprises, Inc. 32,006 900 WPS Resources Corp. 29,475 ------- - --- 414,330 - ------------------------------------------------------------ Electronic Components--1.8% 3,800 AMP, Inc. 199,975 5,600 Arrow Electronics, Inc.(a) 92,400 2,000 Avnet, Inc. 89,875 2,575 CHS Electronics, Inc.(a) 38,464 825 CTS Corp. 39,239 6,140 Electrolux AB, Series B (Sweden) 95,226 1,400 General Motors Corp., Class H 125,650 8,400 Gentex Corp.(a) 192,150 675 Idacorp, Inc. 22,191
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 6 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Electronic Components (cont'd.) 600 Innovex, Inc. $ 11,475 6,000 Matsushita Electric Industrial Co., Ltd. (Japan) 101,917 2,000 Omron Corp. (Japan) 21,834 1,000 Pittway Corp. 28,063 1,390 Royal Philips Electronics N.V. (Netherlands) 101,134 2,800 Sanmina Corp. 185,500 1,725 Thermoquest Corp. 19,406 ------- - --- 1,364,499 - ------------------------------------------------------------ Fertilizer--0.1% 1,125 Potash Corp. of Saskatchewan, Inc. 68,063 - ------------------------------------------------------------ Financial Services--4.0% 1,000 Alcatel Alsthom (France) 116,641 900 American Express Co. 92,587 675 Arthur J. Gallagher & Co. 33,750 5,700 Associates First Capital Corp. 231,206 750 Chittenden Corp. 21,281 12,200 Citigroup, Inc. 683,962 250 Dain Rauscher Corp. 7,719 1,950 Downey Financial Corp. 43,022 2,325 Eaton Vance Corp. 47,953 1,025 Inacom Corp.(a) 13,389 1,400 Lehman Brothers Holdings, Inc. 76,563 12,800 MBNA Corp. 357,600 800 Morgan (J.P.) & Co., Inc. 84,400 9,500 Morgan Stanley Dean Witter Discover & Co. 824,719 1,800 Orix Corp. (Japan) 122,703 1,500 Promise Co., Ltd. (Japan) 71,950 4,150 Resource Bancshares Mortgage Group, Inc. 61,731 3,700 Schwab Charles Corp. 260,156 1,075 Webster Financial Corp. 32,116 ------- - --- 3,183,448 Food & Beverage--0.8% 350 Adolph Coors Co. $ 22,422 7,000 Asahi Breweries, Ltd. (Japan) 94,352 3,270 Cadbury Schweppes PLC (United Kingdom) 52,200 825 Corn Products International, Inc. 21,914 11,700 Diageo PLC (United Kingdom) 131,028 2,600 Heineken N.V. (Netherlands) 140,401 900 J & J Snack Foods Corp.(a) 21,825 40 Nestle SA (Switzerland) 73,409 425 Richfood Holdings, Inc. 9,854 1,825 Riviana Foods, Inc. 41,519 1,000 Universal Foods Corp. 22,500 ------- - --- 631,424 - ------------------------------------------------------------ Forestry--0.1% 2,600 Georgia-Pacific Corp. 58,500 1,600 Universal Forest Product, Inc. 31,600 ------- - --- 90,100 - ------------------------------------------------------------ Health Care--2.0% 13,600 Columbia/HCA Healthcare Corp. 246,500 875 Curative Health Services, Inc. 26,195 11,600 Foundation Health Systems, Inc. 106,575 2,287 Mckesson HBOC, Inc. 171,811 1,900 PacifiCare Health Systems, Inc.(a) 134,425 6,500 PAREXEL International Corp.(a) 169,000 12,100 Tenet Healthcare Corp.(a) 251,075 2,100 United Healthcare Corp. 93,975 4,800 Wellpoint Health Networks, Inc.(a) 359,100 ------- - --- 1,558,656 - ------------------------------------------------------------ Home Furnishings--0.4% 5,425 Ethan Allen Interiors, Inc. 259,044 1,450 Furniture Brands International, Inc.(a) 34,075 ------- - --- 293,119
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 7 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Hotels--0.6% 8,200 Hilton Hotels Corp. 118,388 7,000 Meristar Hospitality Corp. 134,750 8,200 Park Place Entertainment Corp.(a) 55,863 4,300 Promus Hotel Corp.(a) 128,462 ------- - --- 437,463 - ------------------------------------------------------------ Human Resources--0.2% 10,000 RemedyTemp, Inc.(a) 182,500 - ------------------------------------------------------------ Industrial Technology/Instruments--0.1% 2,000 EG&G, Inc. 56,750 - ------------------------------------------------------------ Insurance--4.7% 6,800 ACE, Ltd. 190,400 290 Allianz AG (Germany) 106,489 5,600 Allied Zurich PLC (United Kingdom) 86,445 1,400 American Financial Group, Inc. 50,750 1,000 American General Corp. 71,313 3,200 American International Group, Inc. 329,400 900 Amerin Corp.(a) 20,925 930 Axa-UAP (France) 135,119 1,500 Capital Re Corp. 27,281 4,900 Chubb Corp. 287,875 1,115 Fidelity National Financial, Inc. 29,687 4,050 Financial Security Assurance Holdings, Ltd. 222,497 900 First American Financial Corp. 27,506 1,400 Harleysville Group, Inc. 29,575 625 Medical Assurance, Inc.(a) 19,063 5,100 Mutual Risk Management, Ltd. 187,425 7,400 Old Republic International Corp. 144,762 550 Orion Capital Corp. 19,594 775 PartnerRe Ltd. 35,117 2,200 Presidential Life Corp. 40,975 291 Priority Healthcare Corp. 11,320 1,675 Protective Life Corp. 57,892 2,800 Provident Companies, Inc. $ 120,050 9,800 Prudential Corp. PLC (United Kingdom) 151,360 2,500 Reinsurance Group of America, Inc. 168,281 15,000 Royal & Sun Alliance Insurance Group PLC (United Kingdom)(a) 114,356 6,800 SAFECO Corp. 264,350 3,700 St. Paul Companies, Inc. 108,687 3,500 The Equitable Companies, Inc. 244,125 1,500 Tokio Marine & Fire Insurance Co., Ltd. ADR 85,500 1,400 UNUM Corp. 84,613 245 Zurich Versicherungs-Gesellschaft AG (Switzerland) 181,411 ------- - --- 3,654,143 - ------------------------------------------------------------ Leisure 4,400 EMI Group PLC (United Kingdom) 28,240 - ------------------------------------------------------------ Machinery--0.3% 1,625 IDEX Corp. 37,070 1,600 JLG Industries, Inc. 25,200 625 Kaydon Corp. 20,976 2,875 Lincoln Electric Holdings, Inc. 60,735 875 Milacron, Inc. 17,117 300 Plantronics, Inc. 24,206 800 Regal Beloit Corp. 18,400 550 Tecumseh Products Co. 24,578 1,275 Terex Corp.(a) 31,397 ------- - --- 259,679 - ------------------------------------------------------------ Manufacturing--0.2% 1,370 Compagnie Generale des Etablissements Michelin, Series B (France) 52,456 900 Nintendo Co., Ltd. (Japan) 83,555 ------- - --- 136,011
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 8 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------ - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Media--1.5% 12,500 CBS Corp.(a) $ 425,000 4,700 Clear Channel Communications, Inc.(a) 290,812 6,000 Infinity Broadcasting, Corp.(a) 166,125 1,850 King World Productions, Inc.(a) 50,644 4,200 Mirror Group Newspapers PLC (United Kingdom) 14,584 4,200 Omnicom Group, Inc. 268,800 1,050 Tekelec, Inc. 21,000 ------- - --- 1,236,965 - ------------------------------------------------------------ Metals--0.2% 14,400 Broken Hill Proprietary Co., Ltd. (Australia) 105,861 900 Cleveland-Cliffs, Inc. 36,787 1,425 Commercial Metals Co. 35,091 1,125 RTI International Metals, Inc. 13,922 ------- - --- 191,661 - ------------------------------------------------------------ Mining--0.3% 9,100 Freeport-McMoRan Copper & Gold, Inc.(a) 87,019 7,200 Newmont Mining Corp. 127,350 ------- - --- 214,369 - ------------------------------------------------------------ Miscellaneous--0.1% 550 SEACOR Holdings, Inc. 24,475 30 Societe Generale Surveillance SA (Switzerland) 26,499 277 Thyssen AG (Germany) 46,921 ------- - --- 97,895 Office Equipment & Supplies--0.2% 6,700 Harris Corp. $ 251,250 1,000 Kimball International, Inc., (Class 'B' stock) 17,625 11,000 Ricoh Co., Ltd. (Japan) 106,851 2,000 Xerox Corp. 248,000 ------- - --- 623,726 - ------------------------------------------------------------ Oil & Gas Services--2.1% 800 Amerada Hess Corp. 38,000 2,500 Atlantic Richfield Co. 143,437 1,900 BOC Group PLC, ADR 53,675 9,800 BP Amoco PLC (United Kingdom) 133,539 1,350 Devon Energy Corp. 35,353 5,500 Elf Aquitaine SA, ADR 300,438 1,200 Elf Aquitaine SA (France) 130,147 2,325 Energen Corp. 39,670 19,800 ENI SpA (Italy) 117,500 3,150 Helmerich & Payne, Inc. 55,322 3,000 Keyspan Energy 81,187 7,500 Newfield Exploration Co.(a) 139,687 3,000 Occidental Petroleum Corp. 45,188 1,075 Oneok, Inc. 31,444 4,000 Oryx Energy Co.(a) 48,750 660 R & B Falcon Corp.(a) 4,661 3,250 Tesoro Petroleum Corp. 35,344 1,900 Total SA, ADR 97,256 2,875 Wicor, Inc. 57,680 ------- - --- 1,588,278 - ------------------------------------------------------------ Paper & Packaging--1.8% 1,075 Ball Corp. 48,375 825 Caraustar Industries, Inc. 23,306 1,600 Fort James Corp. 57,400 4,200 Georgia-Pacific Group (Japan) 270,900 4,300 International Paper Co. 170,119 5,400 Mead Corp. 154,575 1,900 Rayonier, Inc. 83,600 1,525 Rock-Tenn Co., (Class 'A' Stock) 27,450
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 9 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Paper & Packaging (cont'd.) 3,000 Temple-Inland, Inc. $ 171,187 1,050 UPM-Kymmene OYJ (Finland) 27,455 3,400 Weyerhaeuser Co. 184,025 5,700 Willamette Industries, Inc. 199,500 ------- - --- 1,417,892 - ------------------------------------------------------------ Pharmaceuticals--3.4% 500 Alpharma, Inc. 17,313 5,700 American Home Products Corp. 334,519 5,900 Astra AB, Series B (Sweden) 126,290 750 Bindley Western Industries, Inc. 18,938 2,700 Eli Lilly & Co. 252,956 710 Medtronic, Inc. 56,555 2,000 Merck & Co., Inc. 293,500 800 Ocular Sciences, Inc.(a) 18,500 2,500 Pfizer, Inc. 321,562 3,200 Pharmacia & Upjohn, Inc. 184,000 3,400 Rhone-Poulenc SA, Series A (France) 178,963 1,000 Roberts Pharmaceutical Corp. 19,500 8 Roche Holdings AG (Switzerland) 104,611 7,300 Schering-Plough Corp. 397,850 1,125 Serologicals Corp. 29,672 4,900 Warner-Lambert Co. 353,719 ------- - --- 2,708,448 - ------------------------------------------------------------ Photography--0.3% 2,100 Eastman Kodak Co. 137,288 - ------------------------------------------------------------ Printing & Publishing--0.1% 450 Consolidated Graphics, Inc. 32,625 1,075 Franklin Covey Co. 17,872 1,175 Hollinger International, Inc. 15,422 550 Valassis Communications, Inc.(a) 28,118 950 World Color Press, Inc.(a) 23,394 ------- - --- 117,431 Real Estate Investment Trusts--0.4% 2,200 Franchise Finance Corp., of America $ 50,600 8,500 Glenborough Realty Trust, Inc. 149,281 1,900 The Rouse Co. 44,888 ------- - --- 244,769 - ------------------------------------------------------------ Restaurants--1.1% 6,000 CKE Restaurants, Inc. 142,500 18,700 Darden Restaurants, Inc. 350,625 450 IHOP Corp. 19,350 3,400 McDonald's Corp. 267,962 6,600 Ryan's Family Steak Houses, Inc.(a) 91,163 ------- - --- 871,600 - ------------------------------------------------------------ Retail--3.7% 425 BJ's Wholesale Club, Inc.(a) 18,913 1,000 Buckle, Inc. 26,750 775 Department 56, Inc. 24,509 8,200 Dillards, Inc. (Class 'A' stock) 203,462 4,100 Gap, Inc. 263,169 7,700 Great Universal Stores PLC (United Kingdom) 98,651 7,200 Home Depot, Inc. 434,700 12,000 IKON Office Solutions, Inc. 192,000 15,800 Kmart Corp.(a) 277,487 5,000 Kohl's Corp.(a) 338,750 2,420 Metro AG (Germany) 196,709 4,700 Pep Boys - Manny, Moe & Jack 74,025 3,200 Rite Aid Corp. 157,200 1,700 Ross Stores, Inc. 67,150 1,600 Sears, Roebuck & Co. 64,200 7,800 Staples, Inc.(a) 223,275 5,500 Toys 'R' Us, Inc.(a) 82,500 1,600 Wal-Mart Stores, Inc. 137,600 1,125 Zale Corp.(a) 36,914 ------- - --- 2,917,964
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 10 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Shares Description Value (Note 1) ------------------------------------------------------- - ----- Semiconductors--1.3% 3,800 Applied Materials, Inc.(a) $ 240,112 2,200 Etec Systems, Inc.(a) 118,113 2,700 Intel Corp. 380,531 3,700 KLA Tencor Corp.(a) 213,675 5,700 National Semiconductor Corp. 73,744 ------- - --- 1,026,175 - ------------------------------------------------------------ Softwares--1.5% 7,000 12 Technologies, Inc.(a) 244,125 1,175 Check Point Software Technologies, Ltd.(a) 56,988 900 Dialogic Corp.(a) 22,950 3,000 Documentum, Inc.(a) 69,938 6,100 HNC Software, Inc.(a) 176,137 2,200 Intuit, Inc.(a) 200,200 5,700 Rational Software Corp.(a) 188,456 3,000 VERITAS Software Corp.(a) 250,875 ------- - --- 1,209,669 - ------------------------------------------------------------ Telecommunications--4.0% 2,900 AirTouch Communications, Inc.(a) 280,031 1,275 Alliant Communications, Inc. 54,188 2,500 ALLTEL Corp. 161,406 18,000 Aspect Telecommunications Corp.(a) 162,000 2,000 AT&T Corp. 181,500 5,000 Excel Switching Corp. 138,438 9,700 MCI WorldCom, Inc.(a) 773,575 3 NTT Mobile Communications (Japan) 126,365 12,500 Natural Microsystems Corp.(a) 85,156 8 Nippon Telegraph & Telephone Corp. (Japan) 64,506 1,700 Nokia Corp., ADR(a) 244,800 3,700 Qwest Communications International, Inc.(a) 221,769 28,000 Telecom. Italia SpA (Italy) 189,399 4,039 Telefonica SA (Spain) 181,202 ------- - --- 2,864,335 Tobacco--1.5% 11,200 British America Tobacco PLC (United Kingdom) $ 116,029 14 Japan Tobacco, Inc. (Japan) 135,992 4,300 Loews Corp. 362,006 4,800 Philip Morris Co., Inc. 225,600 8,900 RJR Nabisco Holdings Corp. 240,300 1,825 Universal Corp. 55,320 ------- - --- 1,135,247 - ------------------------------------------------------------ Trucking & Shipping--0.2% 8,000 Air Express International Corp. 151,000 1,175 US Freightways Corp. 40,978 ------- - --- 191,978 - ------------------------------------------------------------ Utilities--1.2% 1,600 Atmos Energy Corp. 47,700 3,125 California Water Service Group 81,445 780 Cie General des Eaux (France) 228,248 1,500 GPU, Inc. 63,938 2,500 Houston Industries, Inc.(a) 75,937 3,900 Pacific Gateway Exchange, Inc.(a) 129,188 630 Suez Lyonnaise des Eaux (France) 129,921 2,500 Unicom Corp. 89,062 3,775 Washington Gas Light Co. 90,600 ------- - --- 936,039 - ------------------------------------------------------------ Waste Management--0.1% 2,500 Waste Management, Inc. 124,844 ------- - --- Total common stocks (cost $44,505,056) 48,246,077 ------- - ---
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 11 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Principal Moody's Amount Rating (000) Description Value (Note 1) - ------------------------------------------------------------ CORPORATE BONDS--11.7% - ------------------------------------------------------------ Airlines--0.3% Ba2 $ 250 Continental Airlines, Inc., Sr. Notes, 8.00%, 12/15/05 $ 245,958 - ------------------------------------------------------------ Audio/Visual--0.3% Ba2 250 Imax Corp., Sr. Notes, 7.875%, 12/1/05 250,938 - ------------------------------------------------------------ Automotive Parts--0.3% B3 250 Hayes Wheels Int'l., Inc., Sr. Sub. Notes, 9.125%, 7/15/07 262,500 - ------------------------------------------------------------ Building Products--0.3% Ba3 250 Building Materials Corp. of America, Sr. Notes, 8.00%, 12/1/08 250,625 - ------------------------------------------------------------ Cable--1.1% B1 250 Adelphia Communications Corp., Sr. Notes, 7.75%, 1/15/09 253,125 B3 250 Avalon Cable, Inc., Sr. Sub. Notes, 9.375%, 12/1/08 262,812 Baa3 300 TCI Communications, Inc., MTN, 6.46%, 3/6/00 304,011 --- - -------- 819,948 - ------------------------------------------------------------ Casinos--0.3% Ba2 250 Harrahs Operating, Inc., Gtd. Sr. Sub. Notes, 7.875%, 12/15/05 252,500 Coal--0.3% Ba3 $ 250 P & L Coal Holdings Corp., Sr. Notes, 8.875%, 5/15/08 $ 258,437 - ------------------------------------------------------------ Engineering & Construction--0.2% B1 129 CSC Holdings, Inc., Sr. Sub. Deb., 10.50%, 5/15/16 154,478 - ------------------------------------------------------------ Entertainment--0.3% B3 250 AMC Entertainment, Inc., Sr. Sub. Notes, 9.50%, 2/1/11 250,000 - ------------------------------------------------------------ Fertilizer--0.1% B2 40 Scotts Company, Sr. Sub. Notes, 8.625%, 1/15/09 41,300 - ------------------------------------------------------------ Financial Services--0.1% Ba1 100 GS Escrow Corp., Sr. Notes, 6.75%, 8/1/03 96,520 - ------------------------------------------------------------ Health Care--0.6% Ba2 250 Columbia/HCA Healthcare Corp., Notes, 6.91%, 6/15/05 244,265 B2 250 Integrated Health Services, Inc., Sr. Sub. Notes, Ser. A, 9.25%, 1/15/08 235,000 --- - -------- 479,265 - ------------------------------------------------------------ Industrials--0.5% B2 250 Purina Mills, Inc., Sr. Sub. Notes, 9.00%, 3/15/10 245,000
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 12 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Principal Moody's Amount Rating (000) Description Value (Note 1) - ------------------------------------------------------------ Industrials (cont'd.) B3 $ 250 United Int'l. Holdings, Inc., Sr. Disc. Notes, Zero Coupon (until 2/15/03) 10.75%, 2/15/08 $ 165,312 --- - -------- 410,312 - ------------------------------------------------------------ Manufacturing--0.3% NR 250 Westinghouse Air Brake Co., Sr. Notes, 9.375%, 6/15/05 260,000 - ------------------------------------------------------------ Media--0.7% B2 250 Ackerly Group, Inc., Sr. Sub. Notes, 9.00%, 1/15/09 260,000 Baa3 265 Time Warner, Inc., Series 97-1, 6.10%, 12/30/01 269,637 --- - -------- 529,637 - ------------------------------------------------------------ Oil & Gas--0.9% Ba2 250 Gulf Canada Resources Ltd., Sr. Sub. Deb., 9.625%, 7/1/05 255,000 Ba2 450 Petroleos Mexicanos, Gtd. Notes, (Mexico) 9.375%, 12/2/08 427,500 --- - -------- 682,500 - ------------------------------------------------------------ Paper & Packaging--0.7% B1 250 S.D. Warren Co., Sr. Sub. Notes, 12.00%, 12/15/04 271,250 B3 250 Stone Container Corp., Sr. Sub. Deb., 12.75%, 4/1/02 252,500 --- - -------- 523,750 Printing & Publishing--0.7% B1 $ 250 Mail Well I Corp., Sr. Sub. Notes, 8.75%, 12/15/08 $ 256,250 B2 250 Transwestern Publishing Co., LP, Sr. Sub. Notes, 9.625%, 11/15/07 261,562 --- - -------- 517,812 - ------------------------------------------------------------ Real Estate--0.3% Ba2 250 HMH Properties, Inc., Sr. Notes, 8.45%, 12/1/08 250,000 - ------------------------------------------------------------ Restaurants--0.8% B2 125 Advantica Restaurant Group, Inc., Sr. Notes, 11.25%, 1/15/08 128,750 B2 250 Carrols Corp., Sr. Sub. Notes, 9.50%, 12/1/08 253,125 Ba1 250 Felcor Suites, LP, Gtd. Sr. Notes, 7.375%, 10/1/04 239,375 --- - -------- 621,250 - ------------------------------------------------------------ Schools--0.1% B3 100 Kindercare Learning Center, Inc., Sr. Sub. Notes, 9.50%, 2/15/09 100,000 - ------------------------------------------------------------ Steel--0.3% B2 250 UCAR Global Enterprises, Inc., Sr. Sub. Notes, 12.00%, 1/15/05 262,500
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 13 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Principal Moody's Amount Rating (000) Description Value (Note 1) - ------------------------------------------------------------ Telecommunications--0.9% B2 $ 100 Bresnan Communications Group, Sr. Notes, 8.00%, 2/1/09 $ 102,000 B2 200 Intermedia Communications, Inc., Sr. Notes, 8.60%, 6/1/08 192,000 B3 150 Level 3 Communications, Inc., Sr. Disc. Notes, Zero Coupon (until 12/1/03) 10.50%, 12/1/08 88,500 B1 250 Telewest PLC, Sr. Disc. Deb., Zero Coupon (until 10/1/00) 11.00%, 10/1/07 (United Kingdom) 221,250 --- - -------- 603,750 - ------------------------------------------------------------ Utilities--1.0% Ba2 250 Calpine Corp., Sr. Notes, 7.875%, 4/1/08 252,500 CMS Energy Corp., Sr. Notes, Ba3 50 6.75%, 1/15/04 50,000 Ba3 250 7.50%, 1/15/09 257,500 Ba2 200 Niagara Mohawk Power Corp., Sr. Notes, Series C, 7.125%, 7/1/01 203,162 --- - -------- 763,162 - ------------------------------------------------------------ Waste Management--0.3% Ba2 250 Allied Waste North America Corp., Notes, 7.875%, 1/1/09 256,250 --- - -------- Total corporate bonds (cost $9,085,571) 9,143,392 --- - -------- - ------------------------------------------------------------ U.S. GOVERNMENT AGENCIES AND SECURITIES--15.3% $ 117 Government National Mortgage Assoc., 6.625%, 9/20/22 $ 119,502 Government National Mortgage Assoc., Single Family, $ 250 6.00%, 2/22/29 $ 247,970 2,800 6.50%, 3/23/29 2,828,875 United States Treasury Bonds, 1,100 6.00%, 2/15/26 1,207,426 300 8.50%, 2/15/20 417,936 2,100 14.00%, 11/15/11 3,315,039 United States Treasury Notes, 800 3.875%, 1/15/09 807,000 1,650 5.375%, 7/31/00 1,667,275 1,200 7.00%, 7/15/06 1,366,500 --- - -------- Total U.S. government agencies and securities (cost $11,920,947) 11,977,523 --- - -------- - ------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS--1.2% Aaa 200 DLJ Mortgage Acceptance Corp., 7.75%, 1/1/21 199,875 276 Federal Home Loan Mortgage Corp., Series 7-A, Class P/T-WM, 7.00%, 9/17/31 280,201 490 Federal National Mortgage Assoc., Series 1998-73, Class MZ, 6.30%, 10/17/38 478,363 --- - -------- Total collateralized mortgage obligations (cost $961,492) 958,439 --- - -------- - ------------------------------------------------------------ MUNICIPAL BONDS--0.4% NR 300 New York, New York, Series B, 6.00%, 8/1/01 (cost $304,281) 305,217
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 14 Portfolio of Investments as of January 31, 1999 PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------
Principal Moody's Amount Rating (000) Description Value (Note 1) - ------------------------------------------------------------ ASSET-BACKED SECURITIES--0.4% Aaa $ 300 TMA Mortgage Funding Trust, Series 1998-1A, Collateral Asset Bkd. Note, 6.251%, 1/25/29 (cost $299,790) $ 297,930 --- - -------- Total long-term investments (cost $67,077,137) 70,928,578 --- - -------- - ------------------------------------------------------------ SHORT-TERM INVESTMENTS--13.4% COMMERCIAL PAPER--3.0% - ------------------------------------------------------------ P-1 600 American Information Technologies Corp., 4.81%, 2/17/99 598,717 P-1 400 Du Pont (E. I.) De Nemours & Co., Inc., 4.82%, 2/26/99 398,664 P-1 600 IBM Credit Corp., 4.81%, 2/19/99 598,557 P-1 200 National Rural Utilities Corp., 4.88%, 3/23/99 198,645 P-1 600 Shell Oil Co., 4.81%, 2/12/99 599,118 --- - -------- Total commercial paper (cost $2,393,701) 2,393,701 --- - -------- CORPORATE BOND--0.3% Ba2 $ 200 Cleveland Electric Illuminating Co., MTN, 9.30%, 7/26/99 (cost $202,654) $ 203,239 - ------------------------------------------------------------ REPURCHASE AGREEMENT--10.1% 7,914 Joint Repurchase Agreement Account, 4.72%, 2/1/99 (cost $7,914,000; Note 5) 7,914,000 --- - -------- Total short-term investments (cost $10,510,355) 10,510,940 --- - -------- - ------------------------------------------------------------ Total Investments--104.1% (cost $77,587,492; Note 4) 81,439,518 Liabilities in excess of other assets--(4.1%) (3,238,914) --- - -------- Net Assets--100% $78,200,604 --- - -------- --- - --------
- --------------- (a) Non-income producing security. ADR--American Depository Receipt. AG--Aktiengesellschaft (German Stock Company). LP--Limited Partnership. MTN--Medium Term Note. NR--Not Rated by Moody's or Standard & Poor's PLC--Public Limited Company (British Corporation). SA-- Sociedad Anonima (Spanish Corporation or Societe Anonyme French Corporation). The Fund's current Prospectus contains a description of Moody's and Standard & Poor's ratings. - ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 15 Statement of Assets and Liabilities PRUDENTIAL DIVERSIFIED FUNDS (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------ - --------------------
Assets January 31, 1999 Investments, at value (cost $77,587,492)................................................ .................. $ 81,439,518 Cash........................................................ .............................................. 39,974 Foreign currency, at value ($33,754)................................................... ................... 33,202 Receivable for investments sold........................................................ ................... 3,431,841 Receivable for Fund shares sold........................................................ ................... 1,040,757 Interest and dividends receivable.................................................. ....................... 317,568 Deferred offering costs....................................................... ............................ 78,132 Forward currency contracts - amount receivable from counterparties........................................ 11,414 - ---------------- Total assets...................................................... ..................................... 86,392,406 - ---------------- Liabilities Payable for investments purchased................................................... ...................... 7,638,805 Payable for Fund shares reacquired.................................................. ...................... 319,539 Accrued expenses and other liabilities................................................. ................... 139,208 Management fee payable..................................................... ............................... 47,214 Distribution fee payable..................................................... ............................. 34,939 Forward currency contracts - amount payable from counterparties........................................... 11,636 Withholding taxes payable..................................................... ............................ 461 - ---------------- Total liabilities................................................. ..................................... 8,191,802 - ---------------- Net Assets...................................................... .......................................... $ 78,200,604 - ---------------- - ---------------- Net assets were comprised of: Shares of beneficial interest, at par......................................................... ......... $ 7,324 Paid-in capital in excess of par......................................................... .............. 73,761,214 - ---------------- 73,768,538 Distributions in excess of net investment income...................................................... . (19,083) Accumulated net realized gain on investments................................................. .......... 599,981 Net unrealized appreciation on investments and foreign currency translations........................... 3,851,168 - ---------------- Net assets, January 31, 1999........................................................ ...................... $ 78,200,604 - ---------------- - ---------------- Class A: Net asset value and redemption price per share ($9,189,761 / 860,423 shares of beneficial interest issued and outstanding)......................... $10.68 Maximum sales charge (5% of offering price)...................................................... ...... .56 - ---------------- Maximum offering price to public...................................................... ................. $11.24 - ---------------- - ---------------- Class B: Net asset value, offering price and redemption price per share ($27,075,361 / 2,537,432 shares of beneficial interest issued and outstanding)...................... $10.67 - ---------------- - ---------------- Class C: Net asset value and redemption price per share ($16,940,277 / 1,587,350 shares of beneficial interest issued and outstanding)...................... $10.67 Sales charge (1% of offering price)...................................................... .............. .11 - ---------------- Offering price to public...................................................... ......................... $10.78 - ---------------- - ---------------- Class Z: Net asset value, offering price and redemption price per share ($24,995,205 / 2,338,721 shares of beneficial interest issued and outstanding)...................... $10.69 - ---------------- - ----------------
- ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 16 PRUDENTIAL DIVERSIFIED FUNDS PRUDENTIAL MODERATE GROWTH FUND Statement of Operations (Unaudited) - ------------------------------------------------------------
November 18, 1998(a) Through Net Investment Income January 31, 1999 Income Interest............................ $ 321,833 Dividends (net of foreign withholding taxes of $702)....... 72,037 ----------- Total income..................... 393,870 ----------- Expenses Management fee...................... 100,704 Distribution fee--Class A........... 3,424 Distribution fee--Class B........... 38,181 Distribution fee--Class C........... 28,497 Custodian's fees and expenses....... 63,000 Amortization of offering costs...... 19,868 Registration fees................... 19,500 Reports to shareholders............. 18,000 Transfer agent's fees and expenses......................... 9,000 Legal fees.......................... 8,700 Audit fee and expenses.............. 7,300 Trustees' fees and expenses......... 2,000 Miscellaneous....................... 1,924 ----------- Total expenses................... 320,098 ----------- Net investment income.................. 73,772 ----------- Realized and Unrealized Gain (Loss) on Investment and Foreign Currency Transactions Net realized gain (loss) on: Investment transactions............. 608,288 Foreign currency transactions....... (8,307) ----------- 599,981 ----------- Net unrealized appreciation/depreciation on: Investments......................... 3,852,026 Foreign currencies.................. (858) ----------- 3,851,168 ----------- Net gain on investments................ 4,451,149 ----------- Net Increase in Net Assets Resulting from Operations $4,524,921 ----------- -----------
- --------------- (a) Commencement of investment operations. PRUDENTIAL DIVERSIFIED FUNDS PRUDENTIAL MODERATE GROWTH FUND Statement of Changes in Net Assets (Unaudited) - ------------------------------------------------------------
November 18, 1998(a) Increase (Decrease) In Through Net Assets January 31, 1999 Operations Net investment income................... $ 73,772 Net realized gain on investments and foreign currency transactions........ 599,981 Net unrealized appreciation of investments and foreign currencies... 3,851,168 --------------- - ----- Net increase in net assets resulting from operations...................... 4,524,921 --------------- - ----- Dividends from net investment income (Note 1) Class A.............................. (10,982) Class B.............................. (17,394) Class C.............................. (12,269) Class Z.............................. (52,210) --------------- - ----- (92,855) --------------- - ----- Fund share transactions (net of share conversions) (Note 6) Net proceeds from shares sold........... 78,082,738 Net asset value of shares issued to shareholders in reinvestment of dividends............................ 90,968 Cost of shares reacquired............... (4,435,168) --------------- - ----- Net increase in net assets from Fund share transactions................... 73,738,538 --------------- - ----- Total increase............................. 78,170,604 Net Assets Beginning of period........................ 30,000 --------------- - ----- End of period.............................. $ 78,200,604 --------------- - ----- --------------- - -----
- --------------- (a) Commencement of investment operations. - ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 17 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------ - -------------------- Prudential Diversified Funds (the 'Trust'), is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company presently consisting of three portfolios: Prudential Diversified Conservative Growth Fund, Prudential Diversified Moderate Growth Fund (the 'Fund') and Prudential Diversified High Growth Fund. The Trust was organized as a business trust in Delaware on October 24, 1997. The Fund had no significant operations other than the issuance of 750 shares each of Class A, Class B, Class C and Class Z shares of beneficial interest for $30,000 on September 2, 1998 to Prudential Investments Fund Management LLC ('PIFM'). The Fund commenced investment operations on November 18, 1998. The investment objective of the Fund is to seek to provide capital appreciation and a reasonable level of current income. The Fund seeks to achieve its investment objective by investing in a diversified portfolio of equity and fixed income securities. The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry or country. - ------------------------------------------------------------ Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Funds in the preparation of its financial statements. Securities Valuation: Securities for which the primary market is on an exchange and NASDAQ National Market Securities are valued at the last sales price on such exchange 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 or principal market maker. U.S. Government securities for which market quotations are available shall be valued at a price provided by an independent pricing agent or broker-dealer. Privately placed securities including equity securities for which market prices may be obtained from primary dealers shall be valued at the bid prices provided by such primary dealers. Securities for which market quotations are not readily available, may be valued using the last available market quotation for a period not to exceed five days, provided the Manager and Subadvisor feel this is representative of market value, afterwards, such securities are valued in good faith under procedures adopted by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. In connection with transactions in repurchase agreements with U.S. financial institutions, it is the Fund's policy that its custodian or designated subcustodians, as the case may be under triparty repurchase agreements, take possession of the underlying securities, the value of which exceeds the principal amount of the repurchase transaction including accrued interest. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited. All securities are valued as of 4:15 p.m., New York time. Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) market value of investment securities, other assets and liabilities - at the closing daily rates of exchange. (ii) purchases and sales of investment securities, income and expenses - at the rate of exchange prevailing on the respective dates of such transactions. Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the fiscal period, the Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities held at the end of the period. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of long-term portfolio securities sold during the period. Accordingly, these realized foreign currency losses are included in the reported net realized losses on investment transactions. Net realized losses on foreign currency transactions represent net foreign exchange gains or losses from holdings of foreign currencies, currency gains or losses realized between the trade and settlement dates on security transactions, and the difference between the amounts of dividends, interest and foreign taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains or losses from valuing foreign currency denominated assets and liabilities (other than investments) at fiscal period end exchange rates are reflected as a component of net unrealized appreciation on investments and foreign currencies. - ------------------------------------------------------------ - -------------------- 18 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------ - -------------------- Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin as a result of, among other factors, the possibility of political and economic instability and the level of governmental supervision and regulation of foreign securities markets. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses from investment and currency transactions are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date; interest income is recorded on the accrual basis. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Net investment income (loss), other than distribution fees, and 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: The Fund expects to pay dividends of net investment income semi-annually, and distributions of net realized capital and currency gains, if any, 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: For federal income tax purposes, each Fund is treated as a separate taxpaying entity. It is the intent of the Fund to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to 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 Offering Cost: The Fund incurred approximately $98,000 in connection with the initial offering of the Fund. Offering costs are being amortized over a period of 12 months ending November 1999. - ------------------------------------------------------------ Note 2. Agreements The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM manages the investment operations of the Fund, administers the Fund's affairs and supervises the subadviser's performance of all investment advisory services. PIFM pays for the costs pursuant to the advisory agreements, the cost of compensation of officers of the Fund, occupancy and certain clerical and accounting 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 .75% of the average daily net assets of the Fund. PIFM, in turn, pays the Advisers' fees, computed daily and paid monthly, equal to the annual rate specified below based on the average daily net assets of the Fund segments they manage.
Fee Paid By PIFM Advisers to Advisers - ------------------------------ -------------------------- - ------- Jennison Associates LLC .30% with respect to the first $300 million; .25% for amounts in excess of $300 million The Prudential Investment N/A1 Corporation Lazzard Asset Management .40% Pacific Investment Management .25% Company Franklin Advisers, Inc. .50% The Dreyfus Corporation .45% 1Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by PIFM for its reasonable costs and expenses.
The Fund has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Class A, Class B, Class C and Class Z shares of the Fund. The Fund compensates 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 PIMS. The distribution fees are accrued daily and payable monthly. No distribution or service fees are paid to PIMS as distributor for Class Z shares of the Fund. Pursuant to the Class A, B and C Plans, the Fund compensates 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 period ended January 31, 1999. PIMS has advised the Fund that it has received approximately $192,400 and $46,500 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the period ended January 31, 1999. PIMS has advised the Fund that for the period ended January 31, 1999, it has received approximately $200 and $3,400 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. - ------------------------------------------------------------ - -------------------- 19 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------ - -------------------- PIMS, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential Insurance Company of America. The Trust, 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 period ended January 31, 1999. 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 February 28, 1999 and has been extended through March 12, 1999 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 period ended January 31, 1999, the Fund incurred fees of approximately $7,200 for the services of PMFS. As of January 31, 1999 approximately $4,200 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. - ------------------------------------------------------------ Note 4. Portfolio Securities Purchases and sales of portfolio securities, excluding short- term investments, for the period ended January 31, 1999 were $82,523,167 and $15,640,911, respectively. At January 31, 1999, the Fund had outstanding forward currency contracts to purchase foreign currency, as follows:
Value at Foreign Currency Settlement Date Current Purchase Contracts Payable Value Depreciation - --------------------- --------------- -------- ----------- - ---- Euro Dollars, expiring 2/1/99.... $11,636 $11,414 $(222) ------- -------- ----- ------- -------- -----
The United States federal income tax basis of the Fund's investments as of January 31, 1999 was substantially the same as for financial reporting purposes and accordingly, net unrealized appreciation on investments for federal income tax purposes was $3,852,026 (gross unrealized appreciation-- $5,788,613, gross unrealized depreciation--$1,936,587). Note 5. Joint Repurchase Agreement Account The Fund, along with other affiliated registered investment companies, transfers uninvested cash balances into a single joint account, the daily aggregate balance of which is invested in one or more repurchase agreements collateralized by U.S. Treasury or federal agency obligations. As of January 31, 1999, the Fund had a 1.16% undivided interest in the repurchase agreements in the joint account. The undivided interest for the Fund represents $7,914,000 in principal amount. As of such date, each repurchase agreement in the joint account and the collateral therefore were as follows: Bear, Stearns & Co., Inc., 4.75%, in the principal amount of $200,000,000 repurchase price $200,079,167, due 2/1/99. The value of the collateral including accrued interest was $206,615,704. Morgan (J.P.) Securities, Inc., 4.72%, in the principal amount of $200,000,000, repurchase price $200,078,667, due 2/1/99. The value of the collateral including accrued interest was $204,000,313. Salomon Smith Barney, Inc., 4.73%, in the principal amount of $200,000,000, repurchase price $200,078,883, due 2/1/99. The value of the collateral including accrued interest was $204,209,880. Warburg Dillon Read, LLC, 4.62%, in the principal amount of $80,225,000, repurchase price of $80,285,898, due 2/1/99. The value of the collateral including accrued interest was $81,862,553. - ------------------------------------------------------------ Note 6. Capital The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 5%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Class B shares automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. A special exchange privilege is also available for shareholders who qualified to purchase Class A shares at net asset value. Class Z shares are not subject to any sales or redemption charge and are offered exclusively for sale to a limited group of investors. Of the 7,323,926 shares of beneficial interest issued and outstanding at January 31, 1999, Prudential owned 2,326,045. The Fund has authorized an unlimited number of shares of beneficial interest at $.001 par value. - ------------------------------------------------------------ - -------------------- 20 PRUDENTIAL DIVERSIFIED FUNDS Notes to Financial Statements (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------ - -------------------- Transactions in shares of beneficial interest were as follows:
Class A Shares Amount - ------------------------------------ --------- -------- - --- November 18, 1998(a) through January 31, 1999: Shares sold......................... 896,352 $ 9,111,438 Shares issued in reinvestment of dividends......................... 1,037 10,789 Shares reacquired................... (37,811) (391,550) --------- -------- - --- Net increase in shares outstanding before conversion................. 859,578 8,730,677 Shares issued upon conversion from Class B........................... 95 962 --------- -------- - --- Net increase in shares outstanding....................... 859,673 $ 8,731,639 --------- -------- - --- --------- -------- - --- Class B - ------------------------------------ November 18, 1998(a) through January 31, 1999: Shares sold......................... 2,578,188 $26,201,851 Shares issued in reinvestment of dividends......................... 1,558 16,203 Shares reacquired................... (42,969) (444,552) --------- -------- - --- Net increase in shares outstanding before conversion................. 2,536,777 25,773,502 Shares reacquired upon conversion into Class A...................... (95) (962) --------- -------- - --- Net increase in shares outstanding....................... 2,536,682 $25,772,540 --------- -------- - --- --------- -------- - --- Class C - ------------------------------------ November 18, 1998(a) through January 31, 1999: Shares sold......................... 1,642,099 $16,600,945 Shares issued in reinvestment of dividends......................... 1,133 11,781 Shares reacquired................... (56,632) (590,580) --------- -------- - --- Net increase in shares outstanding....................... 1,586,600 $16,022,146 --------- -------- - --- --------- -------- - --- Class Z - ------------------------------------ November 18, 1998(a) through January 31, 1999: Shares sold......................... 2,615,746 $26,168,504 Shares issued in reinvestment of dividends......................... 5,019 52,195 Shares reacquired................... (282,794) (3,008,486) --------- -------- - --- Net increase in shares outstanding....................... 2,337,971 $23,212,213 --------- -------- - --- --------- -------- - ---
- --------------- (a) Commencement of investment operations. - ------------------------------------------------------------ - -------------------- 21 PRUDENTIAL DIVERSIFIED FUNDS Financial Highlights (Unaudited) PRUDENTIAL MODERATE GROWTH FUND - ------------------------------------------------------------ - --------------------
November 18, 1998(a) Through January 31, 1999 - ---------------------------------------------- Class A Class B Class C - ------------ ------------ ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period........................................ $10.00 $ 10.00 $ 10.00 - ----- ------ ------ Income from investment operations: Net investment income...................................................... . .02 -- -- Net realized and unrealized gain on investments and foreign currencies...... .68 .68 .68 - ----- ------ ------ Total from investment operations......................................... .70 .68 .68 - ----- ------ ------ Less distributions: Dividends from net investment income........................................ (.02) (.01) (.01) - ----- ------ ------ Net asset value, end of period.............................................. $10.68 $ 10.67 $ 10.67 - ----- ------ ------ - ----- ------ ------ TOTAL RETURN(b)................................................... .......... 6.96% 6.79% 6.79% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)............................................. $9,190 $ 27,075 $ 16,940 Average net assets (000).................................................... $6,756 $ 18,833 $ 14,056 Ratios to average net assets:(c) Expenses, including distribution fees.................................... 2.11% 2.86% 2.86% Expenses, excluding distribution fees.................................... 1.86% 1.86% 1.86% Net investment income.................................................... 0.80% 0.05% 0.07% Portfolio turnover rate..................................................... 26% 26% 26% Class Z - ------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period........................................ $ 10.00 - ------ Income from investment operations: Net investment income...................................................... . .02 Net realized and unrealized gain on investments and foreign currencies...... .69 - ------ Total from investment operations......................................... .71 - ------ Less distributions: Dividends from net investment income........................................ (.02) - ------ Net asset value, end of period.............................................. $ 10.69 - ------ - ------ TOTAL RETURN(b)................................................... .......... 7.01% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)............................................. $ 24,995 Average net assets (000).................................................... $ 26,557 Ratios to average net assets:(c) Expenses, including distribution fees.................................... 1.86% Expenses, excluding distribution fees.................................... 1.86% Net investment income.................................................... 1.10% Portfolio turnover rate..................................................... 26%
- --------------- (a) Commencement of investment operations. (b) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total return for periods of less than a full year are not annualized. (c) Annualized. - ------------------------------------------------------------ - -------------------- See Notes to Financial Statements. 22 Getting The Most From Your Prudential Mutual Fund. How many times have you read these letters -- or other financial materials -- and stumbled across a word that you don't understand? Many shareholders have run into the same problem. We'd like to help. So we'll use this space from time to time to explain some of the words you might have read, but not understood. And if you have a favorite word that no one can explain to your satisfaction, please write to us. Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis points. Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate mortgage pools into different maturity classes, called tranches. These instruments are sensitive to changes in interest rates and homeowner refinancing activity. They are subject to prepayment and maturity extension risk. Derivatives: Securities that derive their value from other securities. The rate of return of these financial instruments rises and falls -- sometimes very suddenly -- in response to changes in some specific interest rate, currency, stock, or other variable. Discount Rate: The interest rate charged by the Federal Reserve on loans to member banks. Federal Funds Rate: The interest rate charged by one bank to another on overnight loans. Futures Contract: An agreement to purchase or sell a specific amount of a commodity or financial instrument at a set price at a specified date in the future. Leverage: The use of borrowed assets to enhance return. The expectation is that the interest rate charged on borrowed funds will be lower than the return on the investment. While leverage can increase profits, it can also magnify losses. Liquidity: The ease with which a financial instrument (or product) can be bought or sold (converted into cash) in the financial markets. Price/Earnings Ratio: The price of a share of stock divided by the earnings per share for a 12-month period. Option: An agreement to purchase or sell something, such as shares of stock, by a certain time for a specified price. An option need not be exercised. Spread: The difference between two values; often used to describe the difference between "bid" and "asked" prices of a security, or between the yields of two similar maturity bonds. Yankee Bond: A bond sold by a foreign company or government in the U.S. market and denominated in U.S. dollars. Getting The Most From Your Prudential Mutual Fund. When you invest through Prudential Mutual Funds, you receive financial advice through a Prudential Securities financial advisor or Prudential/Pruco Securities registered representative. Your advisor or representative can provide you with the following services: There's No Reward Without Risk; But Is This Risk Worth It? Your financial advisor or registered representative can help you match the reward you seek with the risk you can tolerate. And risk can be difficult to gauge --sometimes even the simplest investments bear surprising risks. The educated investor knows that markets seldom move in just one direction -- there are times when a market sector or asset class will lose value or provide little in the way of total return. Managing your own expectations is easier with help from someone who understands the markets and who knows you! Keeping Up With The Joneses. A financial advisor or registered representative can help you wade through the numerous mutual funds available to find the ones that fit your own individual investment profile and risk tolerance. While the newspapers and popular magazines are full of advice about investing, they are aimed at generic groups of people or representative individuals, not at you personally. Your financial advisor or registered representative will review your investment objectives with you. This means you can make financial decisions based on the assets and liabilities in your current portfolio and your risk tolerance -- not just based on the current investment fad. Buy Low, Sell High. Buying at the top of a market cycle and selling at the bottom are among the most common investor mistakes. But sometimes it's difficult to hold on to an investment when it's losing value every month. Your financial advisor or registered representative can answer questions when you're confused or worried about your investment, and remind you that you're investing for the long haul. Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 http://www.prudential.com Trustees Eugene C. Dorsey Douglas H. McCorkindale Thomas T. Mooney Officers Robert F. Gunia, President Grace C. Torres, Treasurer Stephen M. Ungerman, Assistant Treasurer David F. Connor, Secretary Manager Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Investment Sub-Advisers The Prudential Investment Corporation Prudential Plaza Newark, NJ 07102-3777 Jennison Associates LLC 466 Lexington Avenue New York, NY 10017 Franklin Advisers, Inc. 777 Mariners Island Blvd. San Mateo, CA 94404 The Dreyfus Corporation 200 Park Avenue New York, NY 10166 Lazard Asset Management 30 Rockefeller Plaza New York, NY 10112 Pacific Investment Management Company 840 Newport Center Drive Newport Beach, CA 92660 Distributor Prudential Investment Management Services LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Custodian State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 Transfer Agent Prudential Mutual Fund Services LLC Raritan Plaza One Edison, NJ 08837 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Legal Counsel Kirkpatrick & Lockhart LLP 1800 Massachusetts Ave., N.W. Washington, DC 20036 The views expressed in this report and information about the Fund's portfolio holdings are for the period covered by this report and are subject to change thereafter. The accompanying financial statements as of January 31, 1999 were not audited and, accordingly, no opinion is expressed on them. This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. (LOGO) Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 74432F505 74432F604 MF186E4 74432F703 74432F802 -----END PRIVACY-ENHANCED MESSAGE-----