<PAGE>
As filed with the Securities and Exchange Commission on May 30, 1997
Registration No. 333-11785
811-07811
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 1 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 2 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL EMERGING GROWTH FUND, INC.
formerly known as Prudential Selected Growth Fund, Inc.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices)(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on June 16, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of its Common Stock,
par value $.001 per share. Registrant will file a notice under such Rule for its
fiscal year ending October 31, 1997 within 60 days of such date.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
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<S> <C> <C> <C>
PART A
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis.......................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information... Fund Expenses; Supplement; How the
Fund Calculates Performance
Item 4. General Description of Cover Page; Fund Highlights; How
Registrant........................ the Fund Invests; General
Information
Item 5. Management of the Fund............ How the Fund is Managed;
Supplement
Item 5A. Management's Discussion of Fund
Performance....................... Financial Highlights; Supplement
Item 6. Capital Stock and Other Taxes, Dividends and
Securities........................ Distributions; General
Information; Shareholder Guide;
Supplement
Item 7. Purchase of Securities Being Shareholder Guide; How the Fund
Offered........................... Values its Shares; How the Fund is
Managed; Supplement
Item 8. Redemption or Repurchase.......... Shareholder Guide; How the Fund
Values its Shares
Item 9. Pending Legal Proceedings......... Not Applicable
PART B
Item 10. Cover Page........................ Cover Page
Item 11. Table of Contents................. Table of Contents
Item 12. General Information and History... General Information
Item 13. Investment Objectives and Investment Objective and Policies;
Policies.......................... Investment Restrictions
Item 14. Management of the Fund............ Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal
Holders of Securities............. Manager
Item 16. Investment Advisory and Other Manager; Distributor; Custodian,
Services.......................... Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other
Practices......................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities........................ Not Applicable
Item 19. Purchase, Redemption and Pricing Purchase and Redemption of Fund
of Securities Being Offered....... Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status........................ Taxes
Item 21. Underwriters...................... Distributor
Item 22. Calculation of Performance Data... Performance Information
Item 23. Financial Statements.............. Statement of Assets and
Liabilities; Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment.
</TABLE>
<PAGE>
The Prospectus of Prudential Emerging Growth Fund, Inc. dated November 18,
1996, is incorporated herein by reference in its entirety from the Rule 497
filing made on November 21, 1996 (File No. 333-11785). This Post-Effective
Amendment to the Registration Statement is not intended to amend the Prospectus
of Prudential Emerging Growth Fund, Inc. dated November 18, 1996, except as
indicated by the enclosed supplement.
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
------------------------------------------------------------
SUPPLEMENT DATED JUNE 16, 1997 TO
PROSPECTUS DATED NOVEMBER 18, 1996
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The Prospectus is hereby supplemented by adding the following section after
page 4:
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS A, CLASS B, CLASS C AND CLASS Z SHARES)
The following financial highlights for Class A, Class B, Class C and Class Z
shares are unaudited. This information should be read in conjuction with the
financial statements and the notes thereto, which appear in the Statement of
Additional Information. The financial highlights contain selected data for a
Class A, Class B, Class C and Class Z share of common stock, respectively,
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. The information has been determined based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
------------- ------------ ------------- ------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(A) TO 1996(A) TO 1996(A) TO 1996(A) TO
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1997 1997 1997 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
------------- ------------ ------------- ------------
Income from investment operations
Net investment loss............................................ (.03) (.05) (.05) (.01)
Net realized and unrealized loss on investment transactions.... (.52) (.53) (.53) (.53)
------------- ------------ ------------- ------------
Total from investment operations........................... (.55) (.58) (.58) (.54)
------------- ------------ ------------- ------------
Net asset value, end period.................................... $ 9.45 $ 9.42 $ 9.42 $ 9.46
------------- ------------ ------------- ------------
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TOTAL RETURN(B):............................................... (5.50)% (5.80 )% (5.80 )% (5.40 )%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................ $ 24,060 $ 59,110 $ 4,824 $ 182
Average net assets (000)....................................... $ 24,743 $ 55,047 $ 4,809 $ 82
Ratios to average net assets;(c)
Expenses, including distribution fees...................... 1.76% 2.51% 2.51% 1.51%
Expenses, excluding distribution fees...................... 1.51% 1.51% 1.51% 1.51%
Net investment loss........................................ (.87 )% (1.67 )% (1.63 )% (.87 )%
Portfolio turnover rate........................................ 41% 41% 41% 41%
Average commission rate paid per share......................... $ 0.0498 $ 0.0498 $ 0.0498 $ 0.0498
</TABLE>
- ------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
1
<PAGE>
The following information further supplements the Prospectus of the Fund.
FUND HIGHLIGHTS--WHO MANAGES THE FUND?
AND HOW THE FUND IS MANAGED--MANAGER
The Prospectus is supplemented by adding the following information to pages
2 and 12:
Effective May 1, 1997, the Fund's Manager, formerly known as Prudential
Mutual Fund Management LLC, changed its name to Prudential Investments Fund
Management LLC (PIFM).
SHAREHOLDER GUIDE
ALTERNATIVE PURCHASE PLAN
CLASS A SHARES
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Class A shares may be
purchased at net asset value (NAV) through Prudential Securities Incorporated
(Prudential Securities) or Prudential Mutual Fund Services LLC (Transfer Agent),
by investors in Individual Retirement Accounts, provided the purchase is made
with the proceeds from a tax-free rollover of assets from a Benefit Plan for
which The Prudential Investment Corporation doing business as Prudential
Investments (Prudential Investments), serves as the recordkeeper or
administrator.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which The Prudential
Insurance Company of America (Prudential) serves as the plan administrator or
recordkeeper, provided that (i) the plan has at least $1 million in existing
assets or 250 eligible employees and (ii) the Fund is an available investment
option. These plans include pension, profit-sharing, stock-bonus or other
employee benefit plans under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code and plans that participate in the Transfer Agent's PruArray and
SmartPath Programs (benefit plan recordkeeping services) (hereafter referred to
as a PruArray or SmartPath Plan). All plans of a company for which Prudential
serves as plan administrator or recordkeeper are aggregated in meeting the $1
million threshold. The term "existing assets" as used herein includes stock
issued by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in the PruArray or SmartPath
Program (Participating Funds). "Existing assets" also include monies invested in
The Guaranteed Interest Account (GIA), a group annuity insurance product issued
by Prudential, and units of The Stable Value Fund (SVF), an unaffiliated bank
collective fund. Class A shares may also be purchased at NAV by plans that have
monies invested in GIA and SVF, provided (i) the purchase is made with the
proceeds of a redemption from either GIA or SVF and (ii) Class A shares are an
investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in the PruArray Program provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at net asset value without regard to the assets or
number of participants in the individual employer's qualified Plan(s) or
non-qualified plans so long as the employers in the Association (i) have
retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (ii) maintain their accounts with the Fund's
transfer agent.
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (i) employees who open an
IRA or Savings Accumulation Plan account with the Fund's transfer agent and (ii)
spouses of employees who open an IRA account with the Fund's transfer agent. The
program is offered to companies that have at least 250 eligible employees.
2
<PAGE>
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (i)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (ii) employees of Prudential Securities and PIFM and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (iii)
employees of subadvisers of the Prudential Mutual Funds provided that purchases
at NAV are permitted by such person's employer, (iv) Prudential employees and
special agents of Prudential and its subsidiaries and all persons who have
retired directly from active service with Prudential or one of its subsidiaries,
(v) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer and (vi) investors who have a
business relationship with a financial adviser who joined Prudential Securities
from another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities or, within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, non-money
market fund sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less) and (iii)
the financial adviser served as the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
CLASS Z SHARES
Class Z shares are currently available for purchases by the following
categories of investors: (i) pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation plans and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code, and non-qualified plans for which the Fund is an
available option (collectively, Benefit Plans); provided that such Benefit Plans
(in combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution assets,
(ii) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option, (iii) certain participants in the MEDLEY Program (group
variable annuity contracts) sponsored by Prudential, for whom Class Z shares of
the Prudential Mutual Funds are an available investment option, (iv) Benefit
Plans for which Prudential Retirement Services serves as record keeper and as of
September 20, 1996 (a) were Class Z shareholders of the Prudential Mutual Funds
or (b) executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds, (v) current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), and (vi) employees of Prudential and/or Prudential
Securities who participate in a Prudential-sponsored employee savings plan.
HOW TO SELL YOUR SHARES
In the case of redemptions from a PruArray or SmartPath Plan, if the
proceeds of the redemption are invested in another investment option of the
plan, in the name of the record holder and at the same address as reflected in
the Transfer Agent's records, a signature guarantee is not required.
3
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES
SYSTEMATIC WITHDRAWAL PLAN. The contingent deferred sales charge (CDSC) will
be waived (or reduced) on certain redemptions from a Systematic Withdrawal Plan.
On an annual basis, up to 12% of the total dollar amount subject to the CDSC may
be redeemed without charge. The Transfer Agent will calculate the total amount
available for this waiver annually, on the earlier of March 1, 1997 or the
anniversary date of your purchase. The CDSC will be waived (or reduced) on
redemptions until this threshold 12% amount is reached.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on the redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
4
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 18, 1996
(AS SUPPLEMENTED JUNE 16, 1997)
Prudential Emerging Growth Fund, Inc. (the Fund) is an open-end, diversified
management investment company. The investment objective of the Fund is long-term
capital appreciation. The Fund seeks to achieve this objective by investing
primarily in equity securities of small and medium sized U.S. companies, ranging
from $500 million to $4.5 billion in market capitalization, with the potential
for above-average growth. The Fund may also invest in (i) equity securities of
other companies, including foreign issuers, (ii) investment grade debt
securities, including of foreign issuers, and (iii) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. The Fund
may engage in various derivative securities transactions, such as options on
stocks, stock indices and foreign currencies, foreign currency exchange
contracts and futures contracts on stock indices and options thereon to hedge
its portfolio and to attempt to enhance return. There can be no assurance that
the Fund's investment objective will be achieved. See "Investment Objective and
Policies."
The Fund's address is Gateway Center Three, Newark, New Jersey 07102-4077,
and its telephone number is
(800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Prudential Emerging Growth Fund, Inc.
dated November 18, 1996 (as supplemented June 16, 1997), copies of which may be
obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN THE
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
Investment Objective and Policies..................... B-2 5
Investment Restrictions............................... B-13 11
Directors and Officers................................ B-15 --
Manager............................................... B-19 12
Distributor........................................... B-20 13
Portfolio Transactions and Brokerage.................. B-22 15
Purchase and Redemption of Fund Shares................ B-23 19
Shareholder Investment Account........................ B-26 19
Net Asset Value....................................... B-29 15
Taxes, Dividends and Distributions.................... B-29 16
Performance Information............................... B-32 16
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-33 15
Report of Independent Accountants..................... B-34 --
Statement of Assets and Liabilities................... B-35 --
Financial Statements..................................
Appendix I--Historical Performance Data............... I-1 --
Appendix II--General Investment Information........... II-1 --
Appendix III--Information Relating to The
Prudential........................................... III-1 --
</TABLE>
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MF168B
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Prudential Emerging Growth Fund, Inc. (the Fund) is an open-end, diversified
management investment company. The investment objective of the Fund is long-term
capital appreciation. Under normal market conditions, the Fund intends to invest
primarily in equity securities of small and medium sized U.S. companies, ranging
from $500 million to $4.5 billion in market capitalization, with the potential
for above-average growth. The Fund may also invest in (i) equity securities of
other companies including foreign issuers, (ii) investment grade debt
securities, including of foreign issuers, and (iii) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. The Fund
may engage in various derivative securities transactions, such as options on
stocks, stock indices and foreign currencies, foreign currency exchange
contracts and the purchase and sale of futures contracts on stock indices and
options thereon to hedge its portfolio and to attempt to enhance return. See
"How the Fund Invests--Investment Objective and Policies" in the Prospectus.
There can be no assurance that the Fund's investment objective will be achieved.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund is permitted to invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government. These obligations,
including those which are guaranteed by Federal agencies or instrumentalities,
may or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association (GNMA), the Farmers
Home Administration and the Small Business Administration are backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Federal Home Loan Bank, the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association, the Student Loan Marketing Association, Resolution Funding
Corporation and the Tennessee Valley Authority, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency. FHLMC investments may include
collateralized mortgage obligations.
Obligations issued or guaranteed as to principal and interest by the United
States Government may be acquired by the Fund in the form of custodial receipts
that evidence ownership of future interest payments, principal payments or both
on certain United States Treasury notes or bonds. Such notes and bonds are held
in custody by a bank on behalf of the owners. These custodial receipts are
commonly referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities, including
those which represent undivided ownership interests in pools of mortgages. The
U.S. Government or the issuing agency or instrumentality guarantees the payment
of interest on and principal of these securities. However, the guarantees do not
extend to the yield or value of the securities nor do the guarantees extend to
the yield or value of the Fund's shares. These securities are in most cases
"pass-through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees. Because the prepayment characteristics of the underlying
mortgages vary, it is not possible to predict accurately the average life of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their maturity date would indicate as
a result of the pass-through of prepayments of principal on the underlying
mortgage obligations. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities can be expected to accelerate.
The Fund's ability to invest in high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses.
The Fund may purchase collateralized mortgage obligations (CMO) issued by
agencies or instrumentalities of the U.S. Government. A CMO is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation to
make
B-2
<PAGE>
interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed securities. The issuer of a series of CMOs may
elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All
future references to CMOs shall also be deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal and interest on the
underlying mortgage assets may be allocated among the several classes of a CMO
series in a number of different ways. Generally, the purpose of the allocation
of the cash flow of a CMO to the various classes is to obtain a more predictable
cash flow to the individual tranches than exists with the underlying collateral
of the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on mortgage-backed securities.
The Fund may also invest in mortgage-backed security strips (MBS strips)
issued by the U.S. Government or its agencies or instrumentalities. MBS strips
are usually structured with two classes that receive different proportions of
the interest and principal distributions on a pool of mortgage assets. A common
type of stripped mortgage security will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yields to maturity on IOs and
POs are sensitive to the expected or anticipated rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Fund's investments in certain qualifying CMOs and REMICs
are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies.
The Fund may invest in both Adjustable Rate Mortgage Securities (ARMs),
which are pass-through mortgage securities collateralized by adjustable rate
mortgages, and Fixed-Rate Mortgage Securities (FRMs), which are collateralized
by fixed-rate mortgages.
The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods of
falling U.S. interest rates, the values of U.S. Government securities generally
rise and, conversely, during periods of rising interest rates, the values of
such securities generally decline. The magnitude of these fluctuations will
generally be greater for securities with longer-term maturities.
FOREIGN SECURITIES
The Fund is permitted to invest in foreign corporate and government
securities. "Foreign Government securities" include debt securities issued or
guaranteed, as to payment of principal and interest, by governments,
quasi-governmental entities, governmental agencies, supranational entities and
other governmental entities (collectively, Government Entities) of foreign
countries denominated in the currencies of such countries or in U.S. dollars
(including debt securities of a Government Entity in any such country
denominated in the currency of another such country).
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank and the
Asian Development Bank. Debt securities of "quasi-governmental entities" are
issued by entities owned by a national, state, or equivalent government or are
obligations of a political unit that are not backed by the national government's
"full faith and credit" and general taxing powers. Examples of quasi-government
issuers include, among others, the Province of Ontario and the City of
Stockholm. "Foreign government securities" shall also include debt securities of
Government Entities denominated in European Currency Units. A European Currency
Unit represents specified amounts of the currencies of certain of the member
states of the European Community.
B-3
<PAGE>
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of income
the Fund is required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. The Fund may, but need
not, enter into forward foreign currency exchange contracts, options on foreign
currencies and futures contracts on foreign currencies and related options, for
hedging purposes, including: locking-in the U.S. dollar price of the purchase or
sale of securities denominated in a foreign currency; locking-in the U.S. dollar
equivalent of dividends to be paid on such securities which are held by the
Fund; and protecting the U.S. dollar value of such securities which are held by
the Fund.
OPTIONS ON SECURITIES
The Fund may purchase and write (i.e., sell) put and call options on
securities that are traded on U.S. or foreign securities exchanges or that are
traded in the over-the-counter markets. A call option is a short-term contract
pursuant to which the purchaser, in return for a premium paid, has the right to
buy the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security against payment of the exercise price. A put option is a
similar contract which gives the purchaser, in return for a premium, the right
to sell the underlying security at a specified price during the term of the
option. The writer of the put, who receives the premium, has the obligation to
buy the underlying security upon exercise at the exercise price. The Fund will
generally write put options when its investment adviser desires to invest in the
underlying security. The premium paid by the purchaser of an option will
reflect, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same security
as the call written where the exercise price of the call held is equal to or
less than the exercise price of the call written; where the exercise price of
the call held is greater than the exercise price of the call written, the Fund
will maintain the difference in cash or liquid securities in a segregated
account with its Custodian. A put option written by the Fund is "covered" if the
Fund holds on a share-for-share basis a put on the same security as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written; otherwise the Fund will maintain cash or
liquid securities in a segregated account with its Custodian equivalent in value
to the exercise price of the option. "Liquid securities," as used in the Fund's
prospectus and statement of additional information include U.S. Government
securities, equity securities and investment-grade debt obligations.
If the writer of an option wishes to terminate the obligation, he or she may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after he or she had been notified of the exercise of an option. Similarly, an
investor who is the holder of an option may liquidate his or her position by
effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected. To secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is generally required to pledge
for the benefit of the broker the underlying security or other assets in
accordance with the rules of the relevant exchange or clearinghouse, such as The
Options Clearing Corporation (OCC), an institution created to interpose itself
between buyers and sellers of options in the United States. Technically, the
clearinghouse assumes the other side of every purchase and sale transaction on
an exchange and, by doing so, guarantees the transaction.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction
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if the price of the transaction is more than the premium received from writing
the option or is less than the premium paid to purchase the option. Because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from the
repurchase of a call option may be offset in whole or in part if the Fund holds
the underlying security by appreciation of the underlying security owned by the
Fund.
The Fund may also purchase a "protective put," i.e., a put option acquired
for the purpose of protecting a portfolio security from a decline in market
value. In exchange for the premium paid for the put option, the Fund acquires
the right to sell the underlying security at the exercise price of the put
regardless of the extent to which the underlying security declines in value. The
loss to the Fund is limited to the premium paid for, and transaction costs in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
the security underlying the put rises, the profit the Fund realizes on the sale
of the security will be reduced by the premium paid for the put option less any
amount (net of transaction costs) for which the put may be sold. Similar
principles apply to the purchase of puts on stock indices, as described below.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, the
Fund may also purchase and sell put and call options on securities indices
traded on U.S. or foreign securities exchanges or traded in the over-the-counter
markets. Options on securities indices are similar to options on securities
except that, rather than the right to take or make delivery of a security at a
specified price, an option on a securities index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the securities index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
This amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the multiplier). The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. All
settlements on options on indices are in cash, and gain or loss depends on price
movements in the securities market generally (or in a particular industry or
segment of the market) rather than price movements in individual securities.
The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per contract
of each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers. Because exercises of index options are settled in cash, a
call writer cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. In addition, unless the Fund has other liquid assets
which are sufficient to satisfy the exercise of a call, the Fund would be
required to liquidate portfolio securities or borrow in order to satisfy the
exercise.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of security prices in the market generally or in an
industry or market segment rather than movements in the price of a particular
security. Accordingly, successful use by the Fund of options on indices would be
subject to the investment adviser's ability to predict correctly movements in
the direction of the securities market generally or of a particular industry.
This requires different skills and techniques than predicting changes in the
price of individual stocks.
RISKS OF TRANSACTIONS IN OPTIONS
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange or otherwise may exist. In such event it might not be
possible to effect closing transactions in particular options, with the result
that the Fund would have to exercise its options in order to realize any profit
and would incur brokerage commissions upon the exercise of call options and upon
the subsequent disposition of underlying securities acquired through the
exercise of call options or upon the purchase of underlying securities for the
exercise of put options. If the Fund as a covered call option writer is unable
to effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying security until the option expires or it delivers the
underlying security upon exercise, and the Fund may lose money.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing
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transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events might not, at
times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
The Fund intends to purchase and sell only those options which are cleared by
clearinghouses whose facilities are considered to be adequate to handle the
volume of options transactions.
RISKS OF OPTIONS ON INDICES
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which could
result in substantial losses to the Fund. It is the policy of the Fund to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. A Fund
will not purchase or sell any index option contract unless and until, in the
investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is not
substantially greater than the risk in connection with options on securities in
the index.
SPECIAL RISKS OF WRITING CALLS ON INDICES
Because exercises of index options are settled in cash, a call writer such
as the Fund cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. However, the Fund will write call options on indices only
under the circumstances described below under "Limitations on Purchase and Sale
of Stock Options, Options on Stock Indices and Foreign Currencies and Futures
Contracts and Related Options."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
portfolio. It is also possible that the index may rise when the Fund's portfolio
of stocks does not rise. If this occurred, the Fund would experience a loss on
the call which is not offset by an increase in the value of its portfolio and
might also experience a loss in its portfolio. However, because the value of a
diversified portfolio will, over time, tend to move in the same direction as the
market, movements in the value of the Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 20% of
such Fund's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is
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able to sell stocks in its portfolio. As with stock options, the Fund will not
learn that an index option has been exercised until the day following the
exercise date but, unlike a call on stock where the Fund would be able to
deliver the underlying securities in settlement, the Fund may have to sell part
of its investment portfolio in order to make settlement in cash, and the price
of such investments might decline before they can be sold. This timing risk
makes certain strategies involving more than one option substantially more risky
with index options than with stock options. For example, even if an index call
which the Fund has written is "covered" by an index call held by the Fund with
the same strike price, the Fund will bear the risk that the level of the index
may decline between the close of trading on the date the exercise notice is
filed with the clearing corporation and the close of trading on the date the
Fund exercises the call it holds or the time the Fund sells the call which, in
either case, would occur no earlier than the day following the day the exercise
notice was filed.
If the Fund holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change causes
the exercised option to fall out-of-the-money, the Fund will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although the
Fund may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff time or by selling rather than exercising an
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely because the cutoff times for index
options may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
RISKS RELATED TO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts to
protect the value of its assets against future changes in the level of currency
exchange rates. The Fund may enter into such contracts on a spot, i.e., cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract.
The Fund's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although there
are no limits on the number of forward contracts which the Fund may enter into,
the Fund may not position hedge (including cross hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities being hedged.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for a fixed
amount of dollars, for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Fund may be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. If a Fund enters into a
hedging transaction as described above, the transaction will be "covered" by the
position being hedged, or the Fund's Custodian will place cash or liquid
securities into a segregated account of the Fund (less the value of the
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"covering" positions, if any) in an amount equal to the value of the Fund's
total assets committed to the consummation of the given forward contract. The
assets placed in the segregated account will be marked-to-market daily, and if
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the value of
the account will, at all times, equal the amount of the Fund's net commitments
with respect to such contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, the Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of the Fund's portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities which are unrelated to exchange rates. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any potential gain
which might result should the value of such currency increase. The Fund's
ability to enter into forward foreign currency exchange contracts may be limited
by certain requirements for qualification as a regulated investment company
under the Internal Revenue Code. See "Taxes, Dividends and Distributions."
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
FUTURES CONTRACTS
As a purchaser of a futures contract, the Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the futures contract
at a specified time in the future for a specified price. As a seller of a
futures contract, the Fund incurs an obligation to deliver the specified amount
of the underlying obligation at a specified time in return for an agreed upon
price. The Fund may purchase futures contracts on debt securities, including
U.S. Government securities, aggregates of debt securities, stock indices and
foreign currencies. The Fund may purchase futures contracts on stock indices and
foreign currencies.
The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the investment adviser anticipates that interest
rates may rise and, concomitantly, the price of the Fund's portfolio securities
may fall, the Fund may sell a futures contract. If declining interest rates are
anticipated, the Fund may purchase a futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by the Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts. In addition, futures contracts will
be bought or sold in order to close out a short or long position in a
corresponding futures contract.
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Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is closed
out by effecting a futures contract purchase for the same aggregate amount of
the specific type of security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss. Similarly,
a futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of security (or currency) and
the same delivery date. If the offsetting sale price exceeds the purchase price,
the purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction.
When the Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an "initial margin" of cash or liquid securities
equal to approximately 2-3% of the contract amount. Initial margin requirements
are established by the Exchanges on which futures contracts trade and may, from
time to time, change. In addition, brokers may establish margin deposit
requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked-to-market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or liquid securities,
called "variation margin", in the name of the broker, which are reflective of
price fluctuations in the futures contract.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures contracts as a
hedging device. In the case of futures contracts on securities indices, the
correlation between the price of the futures contract and the movements in the
index may not be perfect. Therefore, a correct forecast of market trends by the
investment adviser may still not result in a successful hedging transaction, and
the Fund may lose money.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance that
it will be possible, at any particular time, to close a futures position. In the
event the Fund could not close a futures position and the value of such position
declined, the Fund would be required to continue to make daily cash payments of
variation margin. Currently, index futures contracts are available on various
U.S. and foreign securities indices.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of markets and other factors affecting the securities market
generally. If the Fund has insufficient cash to meet daily variation margin
requirements, it may need to sell securities to meet such requirements. Such
sales of securities may be at a time when it is advantageous or disadvantageous
to do so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
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exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. With respect to stock
indices, options are traded on futures contracts for various U.S. and foreign
stock indices including the S&P 500 Stock Index and the NYSE Composite Index.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDICES AND
FOREIGN CURRENCIES AND FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may write put and call options on stocks only if they are covered
as described above, and such options must remain covered so long as the Fund is
obligated as a writer. The Fund will write put options on stock indices and
foreign currencies only if there is segregated with the Fund's Custodian an
amount of cash or liquid securities equal to or greater than the aggregate
exercise price of the puts. The aggregate value of the securities underlying
call options and the obligations underlying put options (as of the date the
options are sold) will not exceed 25% of the Fund's net assets. In addition, the
Fund will not enter into futures contracts or related options if the aggregate
initial margin and premiums exceed 5% of the liquidation value of the Fund's
total assets, taking into account unrealized profits and losses on such
contracts, provided, however, that in the case of an option that is
in-the-money, the in-the-money amount may be excluded in computing such 5%. The
above restriction does not apply to the purchase or sale of futures contracts
and related options for bona fide hedging purposes, within the meaning of
regulations of the Commodity Futures Trading Commission. The Fund does not
intend to purchase options on equity securities or securities indices if the
aggregate premiums paid for such outstanding options would exceed 10% of the
Fund's total assets.
Except as described below, the Fund will write call options on indices only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, cash or liquid securities, or a portfolio of stocks
substantially replicating the movement of the index, in the judgment of the
Fund's investment adviser, with a market value at the time the option is written
of not less than 100% of the current index value times the multiplier times the
number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, at least ten "qualified securities," all of which are
stocks of issuers in such industry or market segment, and that, in the judgment
of the investment adviser, substantially replicate the movement of the index
with a market value at the time the option is written of not less than 100% of
the current index value times the multiplier times the number of contracts. Such
stocks will include stocks which represent at least 50% of the weighting of the
industry or market segment index and will represent at least 50% of the Fund's
holdings in that industry or market segment. No individual security will
represent more than 15% of the amount so segregated, pledged or escrowed in the
case of broadly-based stock market index options or 25% of such amount in the
case of industry or market segment index options. If at the close of business on
any day the market value of such qualified securities so segregated, escrowed or
pledged falls below 100% of the current index value times the multiplier times
the number of contracts, the Fund will so segregate, escrow or pledge an amount
in cash or liquid securities equal in value to the difference. In addition, when
the Fund writes a call on an index which is in-the-money at the time the call is
written, the Fund will segregate with its Custodian or pledge to the broker as
collateral cash or liquid securities equal in value to the amount by which the
call is in-the-money times the multiplier times the number of contracts. Any
amount segregated pursuant to the foregoing sentence may be applied to the
Fund's obligation to segregate additional amounts in the event that the market
value of the qualified securities falls below 100% of the current index value
times the multiplier times the number of contracts. A "qualified security" is an
equity security which is listed on a national securities exchange or listed on
NASDAQ against which the Fund has not written a stock call option and which has
not been hedged by the Fund by the sale of stock index futures. However, if the
Fund holds a call on the same index as the call written where the exercise price
of the call held is equal to or less than the exercise price of the call written
or greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or liquid securities in a segregated account with
its Custodian, it will not be subject to the requirements described in this
paragraph.
B-10
<PAGE>
POSITION LIMITS. Transactions by the Fund in futures contracts and options
will be subject to limitations, if any, established by each of the exchanges,
boards of trade or other trading facilities (including NASDAQ) governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of futures contracts and options
which the Fund may write or purchase may be affected by the futures contracts
and options written or purchased by other investment advisory clients of the
investment adviser. An exchange, board of trade or other trading facility may
order the liquidations of positions found to be in excess of these limits, and
it may impose certain other sanctions.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest without limit in money market instruments, including commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, non-convertible debt securities
(corporate and government), obligations issued or guaranteed by the U.S.
Government, its agencies or its instrumentalities, repurchase agreements
(described more fully below) and cash (foreign currencies or United States
dollars). Such investments may be subject to certain risks, including future
political and economic developments, the possible imposition of withholding
taxes on interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions. See "How the Fund Invests --
Other Investments and Policies" in the Prospectus.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
or sell securities on a when-issued or delayed delivery basis, that is, delivery
and payment can take place a month or more after the date of the transaction.
The Fund will make commitments for such when-issued transactions only with the
intention of actually acquiring the securities. The Fund's Custodian will
maintain, in a separate account of the Fund, cash or liquid securities having a
value equal to or greater than such commitments. If a Fund chooses to dispose of
the right to acquire a when-issued security prior to its acquisition, it could,
as with the disposition of any other portfolio security, incur a gain or loss
due to market fluctuations.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for,
without payment of any further consideration, an equal amount of the securities
of the same issuer as the securities sold short (a short sale against-the-box).
Short sales will be made primarily to defer realization of gain or loss for
federal tax purposes. As a non-fundamental investment restriction, not more than
25% of the Fund's net assets (determined at the time of the short sale) may be
subject to short sales other than short sales against-the-box. However, as a
matter of current operating policy, the Fund does not intend to engage in short
sales other than short sales against-the-box. "How the Fund Invests--Other
Investments and Policies--Short Sales Against-the-Box" in the Prospectus and
"Investment Restrictions".
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by cash and liquid
securities. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Board of Directors.
The investment adviser will monitor the creditworthiness of such parties, under
the general supervision of the Board of Directors. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the SEC. On a daily basis, any uninvested cash balances of the
Fund may be aggregated with those of such investment companies and invested in
one or more repurchase agreements. Each fund participates in the income earned
or accrued in the joint account based on the percentage of its investment.
B-11
<PAGE>
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33 1/3% of the value of
the Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral
(including a letter of credit) that is equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive payments in lieu of the interest and dividends of
the loaned securities, while at the same time earning interest either directly
from the borrower or on the collateral which will be invested in short-term
obligations.
A loan may be terminated by the Fund at any time. If the borrower fails to
maintain the requisite amount of collateral, the loan automatically terminates,
and the Fund could use the collateral to replace the securities while holding
the borrower liable for any excess of replacement cost over collateral. As with
any extensions of credit, there are risks of delay in recovery and in some cases
loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms determined to be creditworthy pursuant to procedures approved by the Board
of Directors of the Fund. On termination of the loan, the borrower is required
to return the securities to the Fund, and any gain or loss in the market price
during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan. The Fund will pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities or
may share the interest earned on collateral with the borrower.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated at the time of the borrowing) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings. If the
Fund's asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, the Fund may be required to sell
portfolio securities to reduce the debt and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell
securities at that time. Such liquidations could cause the Fund to realize gains
on securities held for less than three months. Because no more than 30% of the
Fund's gross income may be derived from the sale or disposition of securities
held for less than three months to maintain the Fund's status as a regulated
investment company under the Internal Revenue Code, such gains would limit the
ability of the Fund to sell other securities held for less than three months
that the Fund might wish to sell. See "Taxes." The Fund will not purchase
portfolio securities when borrowings exceed 5% of the value of its total assets.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
B-12
<PAGE>
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). In addition, in order for commercial paper that is issued in reliance
on Section 4(2) of the Securities Act to be considered liquid, (i) it must be
rated in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
non-affiliated investment companies. Generally, the Fund does not intend to
invest in such securities. If a Fund does invest in securities of other
investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees. See "Investment Restrictions."
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 100%. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio purchases
or sales (excluding all securities, including options, whose maturities or
expiration date at acquisition were one year or less) by the monthly average
value of the portfolio. High portfolio turnover (over 100%) involves
correspondingly greater brokerage commissions and other transaction costs, which
are borne directly by the Fund. In addition, high portfolio turnover may also
mean that a proportionately greater amount of distributions to shareholders will
be taxed as ordinary income rather than long-term capital gains compared to
investment companies with lower portfolio turnover. See "Portfolio Transactions
and Brokerage" and "Taxes."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means with respect to the Fund, the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
B-13
<PAGE>
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a security
on margin.
2. Make short sales of securities or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 20% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 20% of
the value of its total assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Fund to Directors pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets subject to this
restriction.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single issuer,
or (ii) 25% or more of the Fund's total assets (determined at the time of the
investment) would be invested in a single industry.
5. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts. The Fund may not purchase interests
in real estate limited partnerships which are not readily marketable.
6. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon, and forward
foreign currency exchange contracts.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other non-affiliated investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which the Fund will not hold more than 3% of the
outstanding voting securities of any one investment company, will not have
invested more than 5% of its total assets in any one investment company and will
not have invested more than 10% of its total assets (determined at the time of
investment) in such securities of one or more investment companies, or except as
part of a merger, consolidation or other acquisition.
10. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the Fund's total assets.
11. Purchase more than 10% of all outstanding voting securities of any one
issuer.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
B-14
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (72) Director President and Director of BMC Fund, Inc., a closed-end investment
company; prior thereto, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the
Board of Trustees of Mars Hill College; Director of The High
Yield Income Fund, Inc.
Delayne Dedrick Gold (58) Director Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (50) Director Comptroller (since May 1996) of Prudential Investments; Executive
Vice President and Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM); Senior Vice President
(since March 1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief Administrative Officer
(July 1990 - September 1996), Director (January 1989 - September
1996), Executive Vice President, Treasurer and Chief Financial
Officer (June 1987 - September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Director (since May 1989)
of The Asia Pacific Fund, Inc.; Director of The High Yield
Income Fund, Inc.
Donald D. Lennox (78) Director Chairman (since February 1990) and Director (since April 1989) of
International Imaging Materials, Inc. (thermal transfer ribbon
manufacturer); Retired Chairman, Chief Executive Officer and
Director (March 1987 - February 1989) of Schlegel Corporation
(industrial manufacturing); Director of Gleason Corporation,
Personal Sound Technologies, Inc. and The High Yield Income
Fund, Inc.
Douglas H. McCorkindale (57) Director Vice Chairman (since March 1984) of Gannett Co. Inc. (publishing
and media); Director of Gannett Co. Inc., Frontier Corporation
and Continental Airlines, Inc.
*Mendel A. Melzer, CFA (35) Director Chief Investment Officer (since October 1996) of Prudential
751 Broad St. Mutual Funds; formerly Chief Financial Officer (November 1995 -
Newark, NJ 07102 September 1996) of Prudential Investments; Senior Vice President
and Chief Financial Officer (April 1993 - November 1995) of
Prudential Preferred Financial Services; Managing Director
(April 1991 - April 1993) of Prudential Investment Advisors and
Senior Vice President (July 1989 - April 1991) of Prudential
Capital Corporation; Chairman and Director of Prudential Series
Fund, Inc.; Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (55) Director President of the Greater Rochester Metro Chamber of Commerce;
formerly Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority, Rochester Jobs, Inc.,
Executive Service Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast-Midwest Institute, The
Business Council of New York State, First Financial Fund, Inc.,
The High Yield Income Fund, Inc. and The High Yield Plus Fund,
Inc.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Stephen P. Munn (54) Director Chairman (since January 1994), Director and President (since
1988) and Chief Executive Officer (1988 - December 1993) of
Carlisle Companies Incorporated (manufacturer of industrial
products).
*Richard A. Redeker (53) President and Director Employee of Prudential Investments; formerly President, Chief
751 Broad St. Executive Officer and Director (October 1993 - September 1996)
Newark, NJ 07102 of Prudential Mutual Fund Management, Inc.; Executive Vice
President, Director and Member of the Operating Committee
(October 1993 - September 1996) of Prudential Securities;
Director (October 1993 - September 1996) of Prudential
Securities Group, Inc.; Executive Vice President (January 1994 -
September 1996) of Prudential Investments; Director (January
1994 - September 1996) of Prudential Mutual Fund Distributors,
Inc. and Prudential Mutual Fund Services, Inc.; Senior Executive
Vice President and Director (September 1978 - September 1993) of
Kemper Financial Services, Inc.; President and Director of The
High Yield Income Fund, Inc.
Robin B. Smith (57) Director Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief
Executive Officer (January 1989 - August 1996) and President and
Chief Operating Officer (September 1981 - December 1988) of
Publishers Clearing House; Director of BellSouth Corporation,
The Omnicom Group, Inc., Texaco Inc., Springs Industries Inc.
and Kmart Corporation.
Louis A. Weil, III (55) Director President and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and Chief
Executive Officer (August 1991 - December 1995) of Phoenix
Newspapers, Inc.; Publisher (May 1989 - March 1991) of Time
Magazine; formerly President, Publisher & Chief Executive
Officer (February 1986 - August 1989) of The Detroit News;
formerly member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The High Yield Income Fund, Inc.
Clay T. Whitehead (58) Director President (since May 1983) of National Exchange Inc. (new
business development firm).
Susan C. Cote (42) Vice President Vice President, Finance of Prudential Mutual Funds & Annuities;
Executive Vice President (since February 1997) and Chief
Financial Officer (since May 1996) of PIFM; formerly Managing
Director (February 1995 - May 1996) and Vice President (February
1995 - May 1996) of Prudential Investments; Senior Vice
President (January 1989 - January 1995) of Prudential Mutual
Fund Management, Inc.; Senior Vice President (January 1992 -
January 1995) of Prudential Securities.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Thomas A. Early (42) Vice President Vice President and General Counsel of Prudential Mutual Funds &
Annuities; Executive Vice President, Secretary and General
Counsel (since December 1996) of PIFM; formerly Vice President
and General Counsel (March 1994 - March 1997) of Prudential
Retirement Services; Associate General Counsel and Chief
Financial Services Officer (1988-1994) of Frank Russell Company.
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of PIFM; formerly
Senior Vice President (January 1991 - September 1996) and Senior
Counsel (June 1987 - September 1996) of Prudential Mutual Fund
Management, Inc.; Senior Vice President and Senior Counsel
(since July 1992) of Prudential Securities; formerly Vice
President and Associate General Counsel of Prudential
Securities.
Grace C. Torres (37) Treasurer and Principal First Vice President (since December 1994) of PIFM; formerly
Financial and Accounting First Vice President (March 1994 - September 1996) of Prudential
Officer Mutual Fund Management, Inc.; First Vice President (since March
1994) of Prudential Securities; Vice President (July 1989 -
March 1994) of Bankers Trust Corporation.
Marguerite E.H. Morrison (41) Assistant Secretary Vice President (since December 1996) of PIFM; formerly Vice
President and Associate General Counsel (June 1991 - September
1996) of Prudential Mutual Fund Management, Inc.; Vice President
and Associate General Counsel of Prudential Securities.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments and the
Private Asset Group of Prudential; formerly First Vice President
(February 1993 - September 1996) of Prudential Mutual Fund
Management, Inc.; Senior Tax Manager (1981 - January 1993) of
Price Waterhouse LLP.
</TABLE>
- ------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential Securities or PIFM.
** Unless otherwise indicated, the address of the Directors and Officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, Newark, New
Jersey 07102-4077.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," oversee such actions and decide on general policy.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Directors who is not an affiliated person of PIFM
or Prudential Investments annual compensation of $2,500, in addition to certain
out-of-pocket expenses. The amount of annual compensation paid to each Director
may change as a result of the introduction of additional funds upon which the
Director may be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills
at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund.
B-17
<PAGE>
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors of Prudential
Mutual Funds who were age 68 or older as of December 31, 1993. Under this
phase-in provision, Messrs. Beach and Lennox are scheduled to retire on December
31, 1999 and December 31, 1997, respectively.
The following table sets forth the estimated aggregate compensation
estimated to be paid by the Fund for the fiscal year ending October 31, 1997 to
the Directors who are not affiliated with the Manager and the aggregate
compensation paid to such Directors for service on the boards of all other funds
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1996
PENSION OR COMPENSATION
RETIREMENT PAID TO BOARD
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL MEMBERS
COMPENSATION AS PART OF FUND BENEFITS UPON FROM FUND
NAME OF DIRECTOR FROM FUND EXPENSES RETIREMENT COMPLEX
- ---------------------------------------------------- ------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Edward D. Beach $ 4,500 None N/A $ 166,000(21/39)*
Delayne Dedrick Gold $ 4,500 None N/A $ 175,308(21/42)*
Robert F. Gunia (+) $ 4,500 None N/A --
Donald D. Lennox $ 4,500 None N/A $ 90,000(10/22)*
Douglas H. McCorkindale** $ 4,500 None N/A $ 71,208(10/13)*
Mendel A. Melzer (+) $ 4,500 None N/A --
Thomas T. Mooney** $ 4,500 None N/A $ 135,375(18/36)*
Stephen P. Munn $ 4,500 None N/A $ 49,125(6/8)*
Richard A. Redeker (+) $ 4,500 None N/A --
Robin B. Smith** $ 4,500 None N/A $ 89,957(11/20)*
Louis A. Weil, III $ 4,500 None N/A $ 91,250(13/18)*
Clay T. Whitehead $ 4,500 None N/A $ 38,292(5/7)*
</TABLE>
- ------------
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all funds in the Fund Complex for the calendar year
ended December 31, 1996 includes amounts deferred at the election of Directors
under the funds' deferred compensation plans. Including accrued interest, total
compensation amounted to approximately $71,034, $139,869 and $109,294 for
Messrs. McCorkindale and Mooney and Ms. Smith, respectively.
(+) Directors who are "interested" do not receive compensation from the Fund or
any fund in the Fund complex.
As of May 16, 1997, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.
As of May 16, 1997, beneficial owners, directly or indirectly, of more than
5% of any class of shares of the Fund were: Connie P. Bethea, 209 Edgewater Dr.,
Anderson, SC 29624-5104, owned approximately 3,820 Class Z shares (or
approximately 17.5% of the outstanding Class Z shares); Brian Forrest Cooke,
7999 Evanston Rd., Indianapolis, IN 46240-2731, owned approximately 2,997 Class
Z shares (or approximately 13.7% of the outstanding Class Z shares); Freda B.
White, 2412 Gilbert Cir., Arlington, TX 76010-2223, owned approximately 2,500
Class Z shares (or approximately 11.4% of the outstanding Class Z shares);
Mendel Melzer, 6 Gelsey Ln., Basking Ridge, NJ 07920-3062, owned approximately
2,000 Class Z shares (or approximately 9.1% of the outstanding Class Z shares);
PIFM, Three Gateway Center, Newark, NJ 07102, owned approximately 2,500 Class Z
shares (or approximately 11.4% of the outstanding Class Z shares).
As of May 16, 1997, Prudential Securities was the record holder for other
beneficial owners of 2,418,039 Class A shares (approximately 93.5% of such
shares outstanding), 6,025,560 Class B shares (approximately 94.3% of such
shares outstanding), 506,476 Class C shares (approximately 97.3% of such shares
outstanding) and 19,264 Class Z shares (approximately 88.4% of such shares
outstanding) of the Fund. In the event of any meetings of shareholders,
Prudential Securities will forward, or cause the forwarding of, proxy materials
to beneficial owners for which it is the record holder.
B-18
<PAGE>
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC
(formerly Prudential Mutual Fund Management LLC), as successor to Prudential
Mutual Fund Management, Inc. (PIFM or the Manager), Gateway Center Three,
Newark, New Jersey 07102-4077. PIFM serves as manager to all of the other
investment companies that, together with the Fund, comprise the Prudential
Mutual Funds. See "How the Fund is Managed--Manager" in the Prospectus of the
Fund. As of March 31, 1997, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $54.6
billion. According to the Investment Company Institute, as of December 31, 1996,
the Prudential Mutual Funds were the 15th largest family of mutual funds in the
United States.
PIFM is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). Prudential Mutual Fund
Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary of PIFM,
serves as the transfer agent for the Prudential Mutual Funds and, in addition,
provides customer service, recordkeeping and management and administration
services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities and other
assets. In connection therewith, PIFM is obligated to keep certain books and
records of the Fund. PIFM also administers the Fund's corporate affairs and, in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Fund's custodian (the Custodian),
and PMFS, the Fund's transfer and dividend disbursing agent. The management
services of PIFM for the Fund are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .60 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of a Fund (including the fees of PIFM, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Fund. No jurisdiction
currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all personnel of the Fund and the Manager,
except the fees and expenses of Directors who are not affiliated persons of PIFM
or the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of a Fund's business, other than those assumed by a Fund as
described below; and
(c) the fees payable to The Prudential Investment Corporation, doing
business as Prudential Investments (PI or the Subadviser) pursuant to the
Subadvisory Agreement between PIFM and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC and the states under state securities laws,
including the preparation and printing of the Fund's registration statements and
prospectuses for such purposes, (k) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing
B-19
<PAGE>
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Fund's Management
Agreement was last approved by the Board of Directors of the Fund, including all
of the Directors who are not parties to the contract or interested persons of
any such party on May 21, 1997, and by the initial shareholder of the Fund on
October 25, 1996.
PIFM has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that PI will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PI is obligated to keep certain books and records
of the Fund. Under the Subadvisory Agreement, PI, subject to the supervision of
PIFM, is responsible for managing the assets of the Fund in accordance with its
investment objectives, investment program and policies. PI determines what
securities and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
PIFM continues to have responsibility for all investment advisory services
pursuant to the Management Agreement. Under the Subadvisory Agreement, PIFM
compensates PI for its services at an annual rate of .30 of 1% of the Fund's
average daily net assets up to and including $300 million and .25 of 1% of the
Fund's average daily net assets in excess of $300 million.
The Subadvisory Agreement was last approved by the Board of Directors of the
Fund, including all of the Directors who are not parties to the contract or
interested persons of any such party on May 21, 1997, and by the initial
shareholder of the Fund on October 25, 1996.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or PI upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor) One Seaport Plaza, New York, New York 10292, acts as the
distributor of the shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), Prudential Securities incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. Prudential
Securities serves as the Distributor of Class Z shares and incurs the expenses
of distributing the Class Z shares under a Distribution Agreement with the Fund,
none of which are reimbursed by or paid for by the Fund. See "How the Fund is
Managed--Distributor" in the Prospectus of the Fund.
The Class A Plan provides that (i) .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Class B and Class C Plans provide that (i) .25 of 1% of the average daily net
assets of the Class B and Class C shares, respectively, may be paid as a service
fee and (ii) .75 of 1% (not including the service fee) may be paid for
distribution-related expenses with respect to the Class B and Class C shares,
respectively (asset-based sales charge). The Plans were last approved by the
Board of Directors, including a majority of the Rule 12b-1 Directors, on May 21,
1997 [and by the sole shareholder of the Fund on , 1996].
The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without
B-20
<PAGE>
penalty, by the vote of a majority of the Rule 12b-1 Directors or by the vote of
the holders of a majority of the outstanding shares of the applicable class on
not more than 60 days', nor less than 30 days' written notice to any other party
to the Plans. The Plans may not be amended to increase materially the amounts to
be spent for the services described therein without approval by the shareholders
of the applicable class, and all material amendments are required to be approved
by the Board of Directors in the manner described above. Each Plan will
automatically terminate in the event of its assignment. A Fund will not be
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report will include an itemization
of the distribution expenses and the purposes of such expenditures. In addition,
as long as the Plans remain in effect, the selection and nomination of Rule
12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend solicitation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Texas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
B-21
<PAGE>
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. In the case of
Class B shares, interest charges equal to the prime rate plus one percent per
annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not required to be included in the calculation
of the 6.25% limitation. The annual asset-based sales charge with respect to
Class B and Class C shares of the Fund may not exceed .75 of 1%. The 6.25%
limitation applies to a Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in this
section includes the Subadviser. Broker-dealers may receive negotiated brokerage
commissions on Fund portfolio transactions, including options and the purchase
and sale of underlying securities upon the exercise of options. On foreign
securities exchanges, commissions may be fixed. Orders may be directed to any
broker or futures commission merchant including, to the extent and in the manner
permitted by applicable law, Prudential Securities and its affiliates.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. A Fund will not deal with Prudential
Securities or any affiliate in any transaction in which Prudential Securities or
any affiliate acts as principal, except in accordance with rules of the SEC.
Thus, it will not deal with Prudential Securities acting as market maker, and it
will not execute a negotiated trade with Prudential Securities if execution
involves Prudential Securities' acting as principal with respect to any part of
a Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, during the existence
of the syndicate, is a principal underwriter (as defined in the Investment
Company Act), except in accordance with rules of the SEC. This limitation, in
the opinion of the Fund, will not significantly affect a Fund's ability to
pursue its present investment objective. However, in the future in other
circumstances, a Fund may be at a disadvantage because of this limitation in
comparison to other funds with similar objectives but not subject to such
limitations.
In placing orders for portfolio securities of a Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of a Fund, the Manager or the Manager's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by the
Manager in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for a Fund
may be used in managing other investment accounts. Conversely, brokers, dealers
or futures commission merchants furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than a Fund's, and the services furnished by such brokers, dealers or
futures commission merchants may be used by the Manager in providing investment
management for a Fund. Commission rates are established pursuant to negotiations
with the broker, dealer or futures commission merchant based on the quality and
quantity of execution services provided by the broker in the light of generally
prevailing rates. The Manager's policy is to pay higher commissions to brokers,
other than Prudential Securities, for particular transactions than might be
charged if a different broker had been selected, on occasions when, in the
Manager's opinion, this policy furthers the objective of obtaining best price
and execution. In addition, the Manager is authorized to pay higher commissions
on brokerage transactions for a Fund to brokers other than Prudential Securities
(or any affiliate) in order to secure research and investment services described
above, subject to review by the Fund's Board of Directors from time to time as
to the extent and continuation of this practice. The allocation or orders among
brokers and the commission rates paid are reviewed periodically by the Fund's
Board of Directors. The Fund will not pay up for research in principal
transactions.
B-22
<PAGE>
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a securities broker or futures commission merchant for the
Fund. In order for Prudential Securities (or any affiliate) to effect any
portfolio transactions for a Fund, the commissions, fees or other remuneration
received by Prudential Securities (or any affiliate) must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or futures being purchased or sold on an exchange
during a comparable period of time. This standard would allow Prudential
Securities (or any affiliate) to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arm's-length transaction. Furthermore, the Board of
Directors of the Fund, including a majority of the Directors who are not
"interested" persons, has adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for a Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to a Fund at
least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage and futures transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed by
applicable law.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of a Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares of the Fund
are offered to a limited group of investors at net asset value without any sales
charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class represents an interest in the same assets of a Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting rights
on any matter submitted to shareholders that relates solely to its distribution
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold with a maximum sales charge of 5% and Class
B*, Class C* and Class Z shares are sold at net asset value. Using the net asset
value of the Fund at April 30, 1997, the maximum offering price of the Fund's
shares is as follows:
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Net asset value and redemption price per Class A share........... $ 9.45
Maximum sales charge (5% of offering price)...................... .50
-----
Offering price to public......................................... $ 9.95
-----
-----
CLASS B
Net asset value, redemption price and offering price per Class B
share*.......................................................... $ 9.42
-----
-----
CLASS C
Net asset value, redemption price and offering price per Class C
share*.......................................................... $ 9.42
-----
-----
CLASS Z
Net asset value, offering price and redemption price per Class Z
share........................................................... $ 9.46
-----
-----
<FN>
--------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
</TABLE>
B-23
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of a Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus of the Fund.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be controlled
by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code and deferred compensation and annuity plans
under Sections 457 and 403(b)(7) of the Internal Revenue Code.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of a
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. The value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities. The value of existing holdings for
purposes of determining the reduced sales charge is calculated using the maximum
offering or price (net asset value plus maximum sales charge) as of the previous
business day. See "How the Fund Values its Shares" in the Prospectus of each
Fund. The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Rights of Accumulation are
not available to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of a Fund and shares of other Prudential Mutual
Funds (Investment Letter of Intent). Retirement and group plans may also qualify
to purchase Class A shares at net asset value by entering into a Letter of
Intent whereby they agree to enroll, within a thirteen-month period, a specified
number of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of a Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
B-24
<PAGE>
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant goal
over a thirteen-month period. Each investment made during the period, in the
case of an Investment Letter of Intent, will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment made
during the period will be made at net asset value. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser, except in the case of retirement
and group plans where the employer or plan sponsor will be responsible for
paying any applicable sales charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or,
in the case of a trust, a copy of the grantor's
death certificate, plus a copy of the trust
agreement identifying the grantor.
Disability - An individual will be A copy of the Social Security Administration award
considered disabled if he or she is letter or a letter from a physician on the
unable to engage in any substantial physician's letterhead stating that the shareholder
gainful activity by reason of any (or, in the case of a trust, the grantor) is
medically determinable physical or permanently disabled. The letter must also indicate
mental impairment which can be expected the date of disability.
to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the custodial
Custodial Account firm indicating (i) the date of birth of the
shareholder and (ii) that the shareholder is over
age 59 and is taking a normal distribution--signed
by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the
plan administrator/ trustee on company letterhead
indicating the amount of the excess and whether or
not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
B-25
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. For the convenience
of investors, all dividends and distributions are automatically reinvested in
full and fractional shares of the Fund. An investor may direct the Transfer
Agent in writing not less than five full business days prior to the record date
to have subsequent dividends or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such dividend or
distribution at net asset value by returning the check or the proceeds to the
Transfer Agent within 30 days after the payment date. Such investment will be
made at the net asset value per share next determined after receipt of the check
or proceeds by the Transfer Agent. Such shareholder will receive credit for any
contingent deferred sales charge paid in connection with the amount of proceeds
being reinvested.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders the
Exchange Privilege. The Fund makes available to its shareholders the privilege
of exchanging their shares of the Fund for shares of certain other Prudential
Mutual Funds, including one or more specified money market funds, subject in
each case to the minimum investment requirements of such funds. Shares of such
other Prudential Mutual Funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of relative net asset value next determined
after receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. Shares may be exchanged for shares of
another fund only if shares of such fund may legally be sold under applicable
state laws. For retirement and group plans having a limited menu of Prudential
Mutual Funds, the Exchange Privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
shares of certain other Prudential Mutual Funds, shares of Prudential Government
Securities Trust (Short-Intermediate Term Series) and shares of the money market
funds specified below. No fee or sales load will be imposed upon the exchange.
Shareholders of money market funds who acquired such shares upon exchange of
Class A shares may use the Exchange Privilege only to acquire Class A shares of
the Prudential Mutual Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, Inc.
No CDSC will be payable upon such exchange, but a CDSC may be payable upon the
redemption of the Class B and Class C shares acquired as a result of the
exchange. The applicable sales charge will be that imposed by the fund in which
shares were initially purchased and the purchase date will be deemed to be the
date of the initial purchase, rather than the date of the exchange.
B-26
<PAGE>
Class B and Class C shares of the Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into the Fund, such shares will be
subject to the CDSC calculated without regard to the time such shares were held
in the money market fund. In order to minimize the period of time in which
shares are subject to a CDSC, shares exchanged out of the money market fund will
be exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time period
shares are held in a money market fund and "tolled" for purposes of calculating
the CDSC holding period, exchanges are deemed to have been made on the last day
of the month. Thus, if shares are exchanged into a Fund from a money market fund
during the month (and are held in the Fund at the end of the month), the entire
month will be included in the CDSC holding period. Conversely, if shares are
exchanged into a money market fund prior to the last day of the month (and are
held in the money market fund on the last day of the month), the entire month
will be excluded from the CDSC holding period.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.......................................................... $ 110 $ 165 $ 220 $ 275
20 Years.......................................................... 176 264 352 440
15 Years.......................................................... 296 444 592 740
10 Years.......................................................... 555 833 1,110 1,388
5 Years.......................................................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
<FN>
- ------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of a Fund. The investment
return and principal value of an investment will fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost.
</TABLE>
B-27
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in shares of a Fund
monthly by authorizing his or her bank account or Prudential Securities Account
(including a Command Account) to be debited to invest specified dollar amounts
in shares of a Fund. The investor's bank must be a member of the Automatic
Clearing House System. Stock certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus of the Fund.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS. Various qualified retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code) are available through the Distributor. These
plans are for use by both self-employed individuals and corporate employers.
These plans permit either self-direction of accounts by participants, or a
pooled account arrangement. Information regarding the establishment of these
plans, and the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------------------ ---------- ----------
<S> <C> <C>
10 years................ $ 26,165 $ 31,291
15 years................ 44,676 58,649
20 years................ 68,109 98,846
25 years................ 97,780 157,909
30 years................ 135,346 244,692
- ------------
(1)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
</TABLE>
B-28
<PAGE>
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. A Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price on the day of valuation, or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service. Corporate bonds (other than convertible debt securities) and
U.S. Government securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed to
be over-the-counter, are valued on the basis of valuations provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, agency ratings, market transactions in comparable securities
and various relationships between securities in determining value. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, are valued at the mean between the last reported bid and asked
prices provided by principal market makers or independent pricing agents.
Options on stock and stock indices traded on an exchange are valued at the mean
between the most recently quoted bid and asked prices on the respective exchange
and futures contracts and options thereon are valued at their last sales prices
as of the close of the commodities exchange or board of trade. Should an
extraordinary event, which is likely to affect the value of the security, occur
after the close of an exchange on which a portfolio security is traded, such
security will be valued at fair value considering factors determined in good
faith by the investment adviser under procedures established by and under the
general supervision of the Fund's Board of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
net asset value at 4:15 P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem Fund shares have been received or days on which changes in the value
of a Fund's portfolio securities do not affect net asset value. In the event the
New York Stock Exchange closes early on any business day, the net asset value of
a Fund's shares shall be determined at a time between such closing and 4:15
P.M., New York time.
Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A or Class Z shares as a result of the larger distribution-related fee
to which Class B and Class C shares are subject and the net asset value of Class
A shares will generally be lower than that of Class Z shares because Class Z
shares are not subject to any distribution or service fee. It is expected,
however, that the net asset value per share of each class will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution and/or service fee expense accrual
differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income tax
on income which is
B-29
<PAGE>
distributed to shareholders and permits net capital gains of the Fund (i.e., the
excess of net long-term capital gains over net short-term capital losses) to be
treated as long-term capital gains of the shareholders, regardless of how long
shareholders have held their shares in the Fund.
Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Fund's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans, and
gains from the sale or other disposition of securities or options thereon or
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) the Fund derive less than 30% of
its annual gross income from gains (without reduction for losses) from the sale
or other disposition of securities, options thereon, futures contracts, options
thereon, forward contracts and foreign currencies held for less than three
months (except for foreign currencies directly related to the Fund's business of
investing in securities) (the short-short rule); (c) the Fund diversify its
holdings so that, at the end of each quarter of the taxable year (i) at least
50% of the value of the Fund's assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the value of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government securities); and (d) the Fund distribute to its shareholders at
least 90% of its net investment income and net short-term gains (i.e., the
excess of net short-term capital gains over net long-term capital losses) in
each year. These requirements may limit the Fund's ability to engage in or close
out transactions involving futures contracts and options thereon.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will generally be treated as gains and
losses from the sale of securities. If an option written by the Fund on
securities lapses or is terminated through a closing transaction, such as a
repurchase by the Fund of the option from its holder, the Fund will generally
realize short-term capital gain or loss. If securities are sold by the Fund
pursuant to the exercise of a call option written by it, the Fund will include
the premium received in the sale proceeds of the securities delivered in
determining the amount of gain or loss on the sale. Certain of the Fund's
transactions may be subject to wash sale, short sale, conversion transaction and
straddle provisions of the Internal Revenue Code. In addition, debt securities
acquired by the Fund may be subject to original issue discount and market
discount rules.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Fund may invest. See "Investment Objective and Policies." These investments will
generally constitute Section 1256 contracts and will be required to be "marked
to market" for federal income tax purposes at the end of the Fund's taxable
year; that is, treated as having been sold at market value. Except with respect
to certain forward foreign currency exchange contracts, 60% of any gain or loss
recognized on such deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss.
Gains or losses on sales of securities by the Fund will be long-term capital
gains or losses if the securities have been held by it for more than one year,
except in certain cases where the Fund acquires a put or writes a call thereon
or otherwise holds a "short" position with respect to the securities. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. Gains and losses on the sale, lapse or other termination of options on
stock will generally be treated as gains and losses from the sale of stock. For
federal income tax purposes, when call options which the Fund has written expire
unexercised, the premiums received by the Fund give rise to short-term capital
gains at the time of expiration. When a call written by the Fund is exercised,
the selling price of the stock is increased by the amount of the premium, and
the gain or loss on the sale of stock becomes long-term or short-term depending
on the stock's holding period. Certain futures and forward contracts and options
held by the Fund will be required to be "marked-to-market" for federal income
tax purposes, that is, treated as having been sold at fair market value on the
last day of the Fund's fiscal year. Any gain or loss recognized on these deemed
sales of these futures and forward contracts and options will be treated as 60%
long-term captial gain or loss, and the remainder will be treated as short-term
capital gain or loss. Certain of the Fund's transactions may be subject to wash
sale and short sale provisions of the Internal Revenue Code that may, among
other things, require the Fund to defer losses.
The Fund's ability to hold foreign currencies or engage in hedging
activities may be limited by the 30% short-short rule discussed above.
B-30
<PAGE>
A "passive foreign investment company" (PFIC) is a foreign corporation that,
in general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If the Fund acquires and holds
stock in a PFIC beyond the end of the year of its acquisition, the Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock or of any gain from disposition of the stock (collectively, PFIC
income), plus interest thereon, even if the Fund distributes the PFIC income as
a taxable dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
shareholders. Proposed Treasury regulations provide that the Fund may make a
"mark-to-market" election with respect to any stock it holds of a PFIC. If the
election is in effect, at the end of the Fund's taxable year, the Fund will
recognize the amount of gains, if any, with respect to PFIC stock. No loss will
be recognized on PFIC stock. Alternatively, the Fund, if it meets certain
requirements, may elect to treat any PFIC in which it invests as a "qualified
electing fund," in which case, in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain, even if they are not distributed to the Fund; those amounts would
be subject to the distribution requirements applicable to the Fund described
above.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses on forward foreign currency exchange contracts
or dispositions of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition also may be
treated as ordinary gain or loss. These gains, referred to under the Internal
Revenue Code as "Section 988" gains or losses, increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
its shareholders as ordinary income, rather than increasing or decreasing the
amount of the Fund's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, or distributions made before
the losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his or her Fund shares.
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from the
prior year or the twelve-month period ending on October 31 of such prior year,
respectively. To the extent it does not meet these distribution requirements,
the Fund will be subject to a nondeductible 4% excise tax on the undistributed
amount. For purposes of this excise tax, income on which the Fund pays income
tax is treated as distributed.
Any dividends paid shortly after a purchase by an investor may have the
effect of reducing the per share net asset value of the investor's shares by the
per share amount of the dividends. Furthermore, such dividends, although in
effect a return of capital, are subject to federal income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends, including capital gains distributions, which are
expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
B-31
<PAGE>
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Interest income, capital gain net income, gain or loss from Section 1256
contracts (described above), dividend income from foreign corporations and
income from other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary. The Fund does not expect
to meet the requirements of the Internal Revenue Code for "passing-through" to
its shareholders any foreign income taxes paid.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus of the Fund.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total returns for the period from December 31, 1996
(commencement of investment operations) through April 30, 1997 for the Class A,
Class B, Class C and Class Z shares of the Fund were (10.26)%, (10.80)%, (6.80)%
and (5.40)%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus of the Fund.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges. The aggregate total returns for the period
from December 31, 1996 through April 30, 1997 for the Class A, Class B, Class C
and Class Z shares of the Fund were (5.50)%, (5.80)%, (5.80) %, and (5.40)%,
respectively.
B-32
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERFORMANCE
<S> <C> <C> <C>
Comparison of
Different
Types of Investments
Over the Long Term
(1/192612/1994)
Long-Term Govt.
Common Stocks Bonds Inflation
10.2% 4.8% 3.1%
</TABLE>
- ------------
(1)Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1995
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard and Poor's 500 Stock Index, a market-weighted,
unmanaged index of 500 common stocks in a variety of industry sectors. It is a
commonly used indicator of broad stock price movements. This chart is for
illustrative purposes only and is not intended to represent the performance of
any particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Fund and cash and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians provide
custodial services for the Fund's foreign assets held outside the United States.
See "How the Fund is Managed--Custodian and Transfer and Dividend Disbursing
Agent" in the Prospectus.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions. For these services, PMFS receives an annual fee per shareholder
account of $9.00, a new account set-up fee for each manually established account
of $2.00 and a monthly inactive zero balance account fee per shareholder account
of $.20. PMFS is also reimbursed for its out-of-pocket expenses, including but
not limited to postage, stationery, printing, allocable communication expenses
and other costs.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants, and in that capacity audits the
annual reports of the Fund.
B-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholder and Board of Directors of
Prudential Emerging Growth Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of Prudential
Emerging Growth Fund, Inc. (the "Fund") at October 21, 1996. This financial
statement is the responsibility of the Fund's management; our responsibility is
to express an opinion on this financial statement based on our audit. We
conducted our audit of this financial statement in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
October 25, 1996
B-34
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
OCTOBER 21,
1996
-----------
<S> <C>
ASSETS
Cash........................................................................................................ $ 100,000
Deferred organization costs (Note 1)........................................................................ 250,000
-----------
Total assets............................................................................................ 350,000
-----------
LIABILITIES
Deferred organization costs payable (Note 1)................................................................ 250,000
-----------
Net Assets (Note 1)
Applicable to 10,000 shares of common stock............................................................... $ 100,000
-----------
-----------
Calculation of Offering Price
Class A:
Net asset value and redemption price per Class A share.................................................... $ 10.00
Maximum sales charge (5.0% of offering price)............................................................. .53
-----------
Offering price to public.................................................................................. $ 10.53
-----------
-----------
Class B:
Net asset value, offering price and redemption price per Class B share.................................... $ 10.00
-----------
-----------
Class C:
Net asset value, offering price and redemption price per Class C share.................................... $ 10.00
-----------
-----------
Class Z:
Net asset value, offering price and redemption price per Class Z share.................................... $ 10.00
-----------
-----------
</TABLE>
See Notes to Financial Statement.
B-35
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENT
NOTE 1. Prudential Emerging Growth Fund, Inc. ("the Fund"), which was
incorporated in Maryland on August 23, 1996, is an open-end, diversified
management investment company. The Fund has had no significant operation other
than the issuance of 2,500 shares each of Class A, Class B, Class C and Class Z
common stock for $100,000 on October 21, 1996 to Prudential Mutual Fund
Management LLC (PMF). There are 2 billion shares of $.001 par value common stock
authorized divided into four classes, designated Class A, Class B, Class C and
Class Z, each of which consists of 1 billion, 500 million, 300 million and 200
million authorized shares, respectively.
Costs incurred and expected to be incurred in connection with the
organization and offering of the Fund will be paid initially by PMF and will be
repaid to PMF upon commencement of investment operations. Offering costs will be
deferred and amortized over a period not to exceed 12 months. Organizational
costs will be deferred and amortized over the period of benefit not to exceed 60
months from the date the Fund commences investment operations. If any of the
initial shares of the Fund are redeemed by any holder thereof during the period
of amortization of organization expenses, the redemption proceeds will be
reduced by the pro-rata amount of unamortized organization expenses based on the
number of initial shares being redeemed to the number of the initial shares
outstanding.
NOTE 2. AGREEMENTS The Fund has entered into a management agreement with
PMF. PMF is an indirect wholly-owned subsidiary of The Prudential Insurance
Company of America (Prudential).
The management fee paid PMF will be computed daily and payable monthly, at
an annual rate of .60 to 1% of the average daily net assets of the Fund.
Pursuant to a subadvisory agreement between PMF and The Prudential
Investment Corporation (PIC), a wholly-owned subsidiary of Prudential, PIC
furnishes investment advisory services pursuant to the management agreement and
supervises PIC's performance of such services. PMF pays for the services of PIC,
the cost of compensation of officers and employees of the Fund, occupancy and
certain clerical and accounting costs of the Fund. The Fund bears all other
costs and expenses.
PIFM has agreed that, in any fiscal year, it will reimburse the Fund for
expenses (including the fees of PMF but excluding interest, taxes, brokerage
commissions, distribution fees, litigation and indemnification expenses and
other extraordinary expenses) in excess of the most restrictive expense
limitation imposed by state securities commissions. Such expense reimbursement,
if any, will be estimated and accrued daily and payable monthly.
The Fund has entered into a distribution agreement with Prudential
Securities Incorporated (PSI) for distribution of the Fund's shares.
Pursuant to separate Plans of Distribution (the Class A Plan, the Class B
Plan and the Class C Plan, collectively the "Plans") adopted by the Fund under
Rule 12b-1 of the Investment Company Act of 1940, PSI (also the "Distributor")
incurs the expenses of distributing the Fund's Class A, Class B and Class C
shares. These expenses include commissions and account servicing fees paid to,
or on account of financial advisers of PSI and Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions paid to, or on account of,
other broker-dealers or certain financial institutions which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
PSI and Prusec associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.
Pursuant to the Class A Plan, the Fund will compensate PSI for its expenses
with respect to Class A shares at an annual rate of up to .30 of 1% of the
average daily net asset value of the Class A shares. PSI has agreed to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net asset value of the Class A shares for the fiscal year ending
October 31, 1997.
Pursuant to the Class B and Class C Plans, the Fund compensates PSI for its
distribution-related expenses with respect to the Class B and C shares at an
annual rate of 1% of the average daily net assets of the Class B and C shares.
PSI incurs the expense of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which is paid for or reimbursed by
the Fund.
B-36
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF APRIL 30, 1997
(UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--98.9%
COMMON STOCKS--98.8%
- ------------------------------------------------------------
AEROSPACE--0.5%
30,000 Orbital Sciences Corp. (a) $ 442,500
- ------------------------------------------------------------
APPAREL & TEXTILES--6.7%
20,000 Gucci Group 1,387,500
40,000 Kellwood Co. 950,000
25,000 Liz Claiborne, Inc. 1,131,250
30,000 Warnaco Group, Inc. (The) 855,000
40,000 Westpoint Stevens, Inc. (a) 1,565,000
------------
5,888,750
- ------------------------------------------------------------
BROADCASTING--4.7%
40,000 American Radio Systems Corp. (a) 1,170,000
25,000 Clear Channel Communications, Inc.
(a) 1,212,500
40,000 United Video Satellite Group, Inc.
(a) 620,000
30,000 Univision Communications, Inc. (a) 1,020,000
4,900 Westwood One, Inc. (a) 116,988
------------
4,139,488
- ------------------------------------------------------------
CHEMICALS--4.4%
15,000 BetzDearborn, Inc. 960,000
35,000 OM Group, Inc. 975,625
35,000 Sigma-Aldrich Corp. 1,050,000
15,000 WD-40 Co. 866,250
------------
3,851,875
- ------------------------------------------------------------
COMMERCIAL SERVICES--5.5%
15,000 Corrections Corporation of America
(a) 489,375
15,000 Desktop Data Inc. (a) 108,750
30,000 Gartner Group, Inc. (a) 787,500
35,000 MoneyGram Payment Systems, Inc. (a) 341,250
50,600 National Education Corp. (a) 1,024,650
30,000 Omnicare, Inc. 731,250
30,000 Paychex, Inc. 1,404,375
------------
4,887,150
COMPUTER SOFTWARE & SERVICES--10.0%
25,000 Adobe Systems, Inc. $ 978,125
40,000 Affiliated Computer Services, Inc.
(a) 1,040,000
90,000 American Management Systems, Inc.
(a) 2,227,500
35,000 BISYS Group, Inc. (a) 1,120,000
49,300 DST Systems Inc. (a) 1,398,887
35,500 GTECH Holdings Corp. (a) 1,091,625
60,000 USCS International, Inc. (a) 990,000
------------
8,846,137
- ------------------------------------------------------------
COMPUTER SYSTEMS/PERIPHERALS--0.8%
15,000 Seagate Technology, Inc. (a) 688,125
- ------------------------------------------------------------
COSMETICS--0.1%
4,363 ThermoLase Corp. (a) 41,449
- ------------------------------------------------------------
ELECTRONICS--18.0%
20,000 Adaptec, Inc. (a) 740,000
26,666 Analog Devices, Inc. (a) 713,316
25,000 Applied Materials, Inc. (a) 1,371,875
45,000 Burr-Brown Corp. (a) 1,327,500
20,000 Cognex Corp. (a) 492,500
15,000 Diebold, Inc. 502,500
30,000 Fusion Systems Corp. (a) 791,250
30,000 Hadco Corp. (a) 1,282,500
50,000 International Rectifier Corp. (a) 575,000
20,000 Linear Technology Corp. 1,005,000
28,900 Solectron Corp. (a) 1,658,137
10,000 Speedfam International, Inc. (a) 242,500
30,000 Tencor Instruments (a) 1,331,250
30,000 Teradyne, Inc. (a) 982,500
35,000 Thermo Instrument System, Inc. (a) 1,098,125
25,000 Thermo Optek Corp. (a) 290,625
60,000 ThermoQuest Corp. (a) 780,000
15,000 Xilinx Inc. (a) 735,000
------------
15,919,578
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. B-37
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF APRIL 30, 1997
(UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION--0.9%
30,000 Jacobs Engineering Group, Inc. (a) $ 765,000
- ------------------------------------------------------------
ENTERTAINMENT--1.0%
25,000 Imax Corp. (a) 893,750
- ------------------------------------------------------------
ENVIRONMENTAL SERVICES--2.1%
15,000 Ionics, Inc. (a) 690,000
20,000 United Waste Systems, Inc. (a) 675,000
15,000 USA Waste Services, Inc. (a) 491,250
------------
1,856,250
- ------------------------------------------------------------
FINANCIAL SERVICES--5.9%
34,500 Delta Financial Corp. (a) 465,750
15,000 Franklin Resources, Inc. 886,875
20,000 Legg Mason, Inc. 950,000
15,000 Peoples Heritage Financial Group,
Inc. 470,625
15,000 Sirrom Capital Corp. 466,875
60,000 Sovereign Bancorp Inc. 735,000
25,200 Washington Mutual, Inc. 1,244,250
------------
5,219,375
- ------------------------------------------------------------
FOODS--0.9%
30,000 JP Foodservice, Inc. (a) 836,250
- ------------------------------------------------------------
INSURANCE--4.2%
20,000 NAC Re Corp. 775,000
1,300 Nationwide Financial Services, Inc.
(a) 34,450
30,000 SunAmerica, Inc. 1,380,000
30,000 The PMI Group, Inc. 1,533,750
------------
3,723,200
- ------------------------------------------------------------
LODGING--1.7%
20,000 Capstar Hotel Co. (a) 567,500
20,000 Four Seasons Hotels, Inc (Canada)
(a) 445,000
15,000 MGM Grand, Inc. (a) 506,250
------------
1,518,750
MEDICAL SERVICES--6.1%
75,000 Beverly Enterprises, Inc. (a) $ 1,087,500
24,700 Genzyme Corp. (a) 571,187
60,000 OccuSystems, Inc. (a) 1,237,500
50,000 Vencor Inc. (a) 2,081,250
20,000 Vitalink Pharmacy Services, Inc.
(a) 367,500
------------
5,344,937
- ------------------------------------------------------------
MEDICAL TECHNOLOGY--5.2%
45,000 Acuson Corp. (a) 1,091,250
10,000 Incyte Pharmaceuticals, Inc. (a) 425,000
15,000 Luxottica Group S.p.A. (Italy)(ADR) 905,625
40,000 Mentor Corp. 925,000
50,000 Sola International, Inc. (a) 1,250,000
------------
4,596,875
- ------------------------------------------------------------
METALS--0.9%
40,000 Worthington Industries, Inc. 755,000
- ------------------------------------------------------------
OIL & GAS--0.9%
20,000 Falcon Drilling Co., Inc. (a) 765,000
- ------------------------------------------------------------
PHARMACEUTICALS--6.8%
16,900 Biochem Pharma. Inc. (Canada) (a) 303,936
14,900 Copley Pharmaceutical, Inc. (a) 76,363
40,000 Elan Corp. PLC (Ireland)(ADR) (a) 1,360,000
15,000 Liposome Co., Inc. (a) 332,812
45,000 North American Vaccine, Inc.
(Canada) (a) 939,375
50,000 Pharmaceutical Product Development,
Inc. 837,500
22,000 Teva Pharmaceutical Industries Ltd.
(Israel) (ADR) 1,116,500
30,000 Watson Pharmaceuticals, Inc. (a) 1,072,500
------------
6,038,986
- ------------------------------------------------------------
RETAIL--7.2%
20,000 Consolidated Stores Corp. (a) 800,000
25,000 Dollar General Corp. 790,625
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. B-38
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF APRIL 30, 1997
(UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
RETAIL (CONT'D.)
30,000 Kenneth Cole Productions, Inc. (a) $ 498,750
50,000 Neiman Marcus Group, Inc. 1,312,500
15,000 Nine West Group, Inc. (a) 594,375
50,000 OfficeMax Inc. (a) 618,750
50,000 Petco Animal Supplies Inc. (a) 1,068,750
50,000 Stride Rite Corp. 687,500
------------
6,371,250
- ------------------------------------------------------------
SCHOOLS--1.1%
30,000 Apollo Group, Inc. (a) 806,250
5,600 Education Management Corp. (a) 123,200
------------
929,450
- ------------------------------------------------------------
TRANSPORTATION-ROAD & RAIL--2.2%
25,000 Kansas City Southern Industries,
Inc. 1,287,500
20,000 Wisconsin Central Transportation
Corp. (a) 655,000
------------
1,942,500
- ------------------------------------------------------------
TRUCKING & SHIPPING--0.2%
10,000 Simon Transportation Services Inc.
(a) 170,000
- ------------------------------------------------------------
UTILITIES - ELECTRIC--0.8%
18,600 Calenergy, Inc. (a) 727,725
------------
Total common stocks
(cost $86,026,938) 87,159,350
------------
COMMON STOCK UNIT(b)--0.1%
3,168 ThermoLase Corp.
(cost $51,137; value per unit
$16.63; purchased 1997) $ 52,668
------------
Total long-term investments
(cost $86,078,075) 87,212,018
------------
PRINCIPAL
AMOUNT
(000)
- --------
SHORT-TERM INVESTMENTS--1.8%
JOINT REPURCHASE AGREEMENT
$ 1,604 Joint Repurchase Agreement Account
5.42%, 5/1/97
(cost $1,604,000; Note 5) 1,604,000
------------
- ------------------------------------------------------------
TOTAL INVESTMENTS--100.7%
(cost $87,682,075; Note 4) 88,816,018
Liabilities in excess of other
assets--(0.7%) (639,793)
------------
Net Assets--100% $ 88,176,225
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Consists of more than one class of securities traded together as a unit;
each unit consists of one common share and one redemption right.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. B-39
<PAGE>
Statement of Assets and Liabilities
(Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS APRIL 30, 1997
--------------
<S> <C>
Investments, at value (cost $87,682,075).................................................................... $ 88,816,018
Cash........................................................................................................ 9,639
Receivable for investments sold............................................................................. 2,335,494
Deferred organization and offering costs (Note 1)........................................................... 224,472
Dividends and interest receivable........................................................................... 25,868
--------------
Total assets............................................................................................. 91,411,491
--------------
LIABILITIES
Payable for investments purchased........................................................................... 1,653,575
Payable for Fund shares reacquired.......................................................................... 1,335,718
Deferred organization and offering costs payable (Note 1)................................................... 91,445
Accrued expenses............................................................................................ 56,049
Distribution fee payable.................................................................................... 55,849
Management fee payable...................................................................................... 42,630
--------------
Total liabilities........................................................................................ 3,235,266
--------------
NET ASSETS.................................................................................................. $ 88,176,225
--------------
--------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 9,351
Paid-in capital in excess of par......................................................................... 93,847,019
--------------
93,856,370
Accumulated net investment loss.......................................................................... (401,734)
Accumulated net realized loss on investments............................................................. (6,412,354)
Net unrealized appreciation on investments............................................................... 1,133,943
--------------
Net assets, April 30, 1997.................................................................................. $ 88,176,225
--------------
--------------
Class A:
Net asset value and redemption price per share
($24,060,439 / 2,546,990 shares of common stock issued and outstanding)............................... $9.45
Maximum sales charge (5% of offering price).............................................................. .50
--------------
Maximum offering price to public......................................................................... $9.95
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($59,109,907 / 6,272,964 shares of common stock issued and outstanding)............................... $9.42
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($4,823,941 / 511,928 shares of common stock issued and outstanding).................................. $9.42
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($181,938 / 19,241 shares of common stock issued and outstanding)..................................... $9.46
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. B-40
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996(a)
THROUGH
NET INVESTMENT LOSS APRIL 30, 1997
--------------------
<S> <C>
Income
Dividends (net of foreign
withholding taxes of $457)....... $ 90,179
Interest............................ 151,974
-----------
Total income..................... 242,153
-----------
Expenses
Management fee...................... 168,434
Distribution fee--Class A........... 20,507
Distribution fee--Class B........... 182,484
Distribution fee--Class C........... 15,942
Amortization of deferred
organizational and offering
costs............................ 62,527
Custodian's fees and expenses....... 60,000
Transfer agent's fees and
expenses......................... 40,000
Reports to shareholders............. 25,000
Registration fees................... 21,000
Audit fees and expenses............. 18,000
Directors' fees and expenses........ 17,000
Legal fees and expenses............. 12,000
Miscellaneous....................... 993
-----------
Total expenses................... 643,887
-----------
Net investment loss.................... (401,734)
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized loss on investment
transactions........................ (6,412,354)
Net unrealized appreciation on
investments......................... 1,133,943
-----------
Net loss on investments................ (5,278,411)
-----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS.............. $ (5,680,145)
------------
------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996(a)
INCREASE (DECREASE) THROUGH
IN NET ASSETS APRIL 30, 1997
--------------------
<S> <C>
Operations
Net investment loss................. $ (401,734)
Net realized loss on investments.... (6,412,354)
Net unrealized appreciation on
investments...................... 1,133,943
------------
Net decrease in net assets resulting
from operations.................. (5,680,145)
------------
Fund share transactions (net of share
conversion) (Note 6)
Net proceeds from shares sold....... 101,471,348
Cost of shares reacquired........... (7,714,978)
------------
Net increase in net assets from Fund
share transactions............... 93,756,370
------------
Total increase......................... 88,076,225
NET ASSETS
Beginning of period.................... 100,000
------------
End of period.......................... $ 88,176,225
------------
------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. B-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Prudential Emerging Growth Fund, Inc. (the "Fund"), is registered under the
Investment Company Act of 1940, as a divesified, open-end management investment
company. The Fund was incorporated in Maryland on August 23, 1996. The Fund had
no significant operations other than the issuance of 2,500 shares of Class A,
Class B, Class C and Class Z common stock for $100,000 on October 21, 1996 to
Prudential Investments Fund Management LLC ("PIFM"). Investment operations
commenced on December 31, 1996.
The Fund's investment objective is to achieve long-term capital appreciation by
investing primarily in equity securities of small and medium sized U.S.
companies, ranging from $500 million to $4.5 billion in market capitalization,
with the potential for above-average growth.
- ------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments, listed on a securities exchange and NASDAQ
National Market System securities (other than options on stock and stock
indices) are valued at the last sales price on the day of valuation,or, if there
was no sale on such day, mean between the last bid and asked prices on such day,
as provided by a pricing service. Corporate bonds (other than convertible debt
securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued by an independent pricing
service. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by principal market makers.
Options on stock and stock indices traded on an exchange are valued at the mean
between the most recently quoted bid and asked prices provided by the respective
exchange. Futures contracts and options thereon are valued at the last sales
price as of the close of business of the exchange. Securities for which reliable
market quotations are not available or for which the pricing agent or principal
market maker does not provide a valuation will be valued at fair value
determined in good faith by or under the direction of the Board of Directors of
the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
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 collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 P.M., New York time.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts. There were no open foreign
currency contracts at April 30, 1997.
Dividends and Distributions: Dividends from net investment income are declared
and paid annually. The Fund will distribute at least annually net capital gains
in excess of loss carryforwards, if any. 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.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a
- --------------------------------------------------------------------------------
-----
B-42
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
short sale if the market price at termination is less than or greater than,
respectively, the proceeds originally received.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income and net capital gains, if any, to its
shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organization Expenses: Approximately $122,000 of expenses were incurred
in connection with the organization of the Fund. These costs have been deferred
and are being amortized ratably over a period of sixty months from the date the
Fund commenced investment operations.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ("PIC"); PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .60 of 1% of the average daily net assets of the Fund.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans"), regardless of expenses actually
incurred by them. The distribution fees for are accrued daily and payable
monthly. No distribution or service fees are paid to PSI as distributor of the
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plan 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 December 31,
1996 through April 30, 1997.
PSI has advised the Fund that it has received approximately $122,700 in
front-end sales charges resulting from sales of Class A shares for the period
December 31, 1996 through April 30, 1997. From these fees, PSI paid such sales
charges to dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
PSI advised the Fund that for the period December 31, 1996 through April 30,
1997, it received approximately $25,600 and $3,000 in contingent deferred sales
charges imposed upon certain redemptions by certain Class B and Class C
shareholders, respectively.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of February 28,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portio of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of PMF,
serves as the Fund's transfer agent. During the period ended April 30, 1997, the
Fund incurred fees of approximately $39,000 for the services of PMFS. As of
April 30, 1997, approximately $11,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the period ended April 30, 1997 were $126,988,890 and $34,498,113,
respectively.
The cost basis of investments for federal income tax purposes at April 30, 1997,
was $87,682,075 and, accordingly, net unrealized appreciation of investments for
federal income tax purposes was $1,133,943 (gross unrealized
appreciation-$5,637,818; gross unrealized depreciation--$4,503,875).
- ------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of April 30, 1997, the Fund
had a .20% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund
- --------------------------------------------------------------------------------
-----
B-43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
represented $1,604,000 in principal amount. As of such date, each repurchase
agreement in the joint account and the value of the collateral therefor were as
follows:
CS First Boston Corp., 5.50% dated 4/30/97, in the principal amount of
$208,000,000, repurchase price $208,031,778, due 5/1/97. The value of the
collateral including accrued interest is $214,501,123.
J.P. Morgan Securities, 5.42% dated 4/30/97, in the principal amount of
$208,000,000, repurchase price $208,031,316, due 5/1/97. The value of the
collateral including accrued interest is $212,160,231.
SBC Warburg, 5.30% dated 4/30/97, in the principal amount of $144,000,000,
repurchase price $144,021,200, due 5/1/97. The value of the collateral including
accrued interest is $146,969,072.
Smith Barney Inc., 5.25% and 5.44%, both dated 4/30/97, in the principal amount
of $43,121,000 and $208,000,000 respectively, repurchase price $43,127,288 and
$208,031,431 respectively, due 5/1/97. The value of the combined collateral
including accrued interest is $256,144,337.
- ------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares 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 charge and are offered exclusively for sale to a limited
group of investors.
There are 2 billion shares of $.001 par value common stock authorized divided
into four classes, designated Class A, Class B, Class C and Class Z, each of
which consists of 1 billion, 500 million, 300 million and 200 million authorized
shares, respectively.
Transactions in shares of common stock for the period December 31, 1996
(commencement of operations) through April 30, 1997 were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------------------------------------ ---------- ------------
<S> <C> <C>
December 31, 1996* through
April 30, 1997:
Shares sold......................... 3,024,762 $ 30,142,219
Shares reacquired................... (480,363) (4,606,125)
---------- ------------
Net increase in shares outstanding
before conversion................. 2,544,399 25,536,094
Shares issued upon conversion from
Class B........................... 91 885
---------- ------------
Net increase in shares
outstanding....................... 2,544,490 $ 25,536,979
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
December 31, 1996* through
April 30, 1997:
Shares sold......................... 6,555,048 $ 65,663,253
Shares reacquired................... (284,493) (2,716,426)
---------- ------------
Net increase in shares outstanding
before conversion................. 6,270,555 62,946,827
Shares reacquired upon conversion
into Class A...................... (91) (885)
---------- ------------
Net increase in shares
outstanding....................... 6,270,464 $ 62,945,942
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
December 31, 1996* through
April 30, 1997:
Shares sold......................... 544,182 $ 5,446,962
Shares reacquired................... (34,754) (336,784)
---------- ------------
Net increase in shares
outstanding....................... 509,428 $ 5,110,178
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
December 31, 1996* through
April 30, 1997:
Shares sold......................... 22,690 $ 218,914
Shares reacquired................... (5,949) (55,643)
---------- ------------
Net increase in shares
outstanding....................... 16,741 $ 163,271
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
-----
B-44
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------ ------------ ------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(a) 1996(a) 1996(a)
THROUGH THROUGH THROUGH
APRIL 30, APRIL 30, APRIL 30,
1997 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 10.00 $ 10.00 $ 10.00
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss...................................................... (.03) (.05) (.05)
Net realized and unrealized loss on investment transactions.............. (.52) (.53) (.53)
------------ ------------ ------------
Total from investment operations...................................... (.55) (.58) (.58)
------------ ------------ ------------
Net asset value, end of period........................................... $ 9.45 $ 9.42 $ 9.42
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN(c):......................................................... (5.50)% (5.80)% (5.80)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 24,060 $ 59,110 $ 4,824
Average net assets (000)................................................. $ 24,743 $ 55,047 $ 4,809
Ratios to average net assets(b):
Expenses, including distribution fees................................. 1.76% 2.51% 2.51%
Expenses, excluding distribution fees................................. 1.51% 1.51% 1.51%
Net investment loss................................................... (.87)% (1.67)% (1.63)%
Portfolio turnover....................................................... 41% 41% 41%
Average commission rate paid per share................................... $ 0.0498 $ 0.0498 $ 0.0498
<CAPTION>
Class Z
------------
DECEMBER 31,
1996(a)
THROUGH
APRIL 30,
1997
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 10.00
------------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss...................................................... (.01)
Net realized and unrealized loss on investment transactions.............. (.53)
------------
Total from investment operations...................................... (.54)
------------
Net asset value, end of period........................................... $ 9.46
------------
------------
TOTAL RETURN(c):......................................................... (5.40)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 182
Average net assets (000)................................................. $ 82
Ratios to average net assets(b):
Expenses, including distribution fees................................. 1.51%
Expenses, excluding distribution fees................................. 1.51%
Net investment loss................................................... (.87)%
Portfolio turnover....................................................... 41%
Average commission rate paid per share................................... $ 0.0498
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. B-45
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY.
Value of $1000.00 Invested on 1/1/26 through 12/31/96
[CHART]
Source: Ibbotson Associates' EnCORR Software, Chicago, Illinois. All rights
reserved. This example is for illustrative purposes only and is not intended to
represent the past, present, or future performance of the Prudential Emerging
Growth Fund. Small-sized stock performance for the period 1926-1980 is based on
a historical series composed of stocks making up the 5th quintile of the New
York Stock Exchange: thereafter, the index reflects the total return achieved by
Dimensional Fund Advisors (DFA) Small Company Fund. Source of mid-sized stock
performance: University of Chicago's Center for Research in Security Prices
(CRSP). Mid-sized stocks are comprised of an index of medium-sized companies
listed on the New York Stock Exchange (NYSE). All eligible comapanies listed on
the NYSE are ranked by market capitalization and then split into ten equally
populated groups, or deciles. The 3-5 decile represents mid-size companies in
this example. Large-sized stock total return is based on the Standard & Poor's
500 Index, a market-weighted index made up of 500 of the largest stocks in the
U.S. based upon their stock market value. Past performance is not indicative of
future results. Investors cannot buy or invest directly in market indices.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
I-1
<PAGE>
The chart below shows the growth over 15 years of a $1,000 investment made
in the S&P MidCap 400 Index and the S&P 500 stock index on June 30, 1981 with an
ending value on June 30, 1996.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500 S&P Midcap 400
6/30/1981 $1,000.00 $1,000.00
$1,002.10 $994.10
$944.28 $949.96
$897.73 $890.21
$946.20 $956.35
$985.28 $1,007.42
$960.06 $979.62
$947.48 $939.45
$894.52 $914.46
$889.87 $906.78
$930.09 $950.13
$898.37 $934.26
$884.90 $909.50
$869.14 $878.30
$974.66 $970.00
$986.84 $1,001.43
$1,100.43 $1,105.28
$1,144.89 $1,170.93
$1,166.98 $1,201.96
$1,210.39 $1,262.18
$1,238.11 $1,303.32
$1,283.80 $1,357.54
$1,384.96 $1,440.62
$1,372.91 $1,497.82
$1,426.32 $1,547.69
$1,384.24 $1,523.86
$1,405.00 $1,499.78
$1,424.39 $1,552.12
$1,407.87 $1,483.99
$1,437.58 $1,534.00
$1,430.10 $1,515.43
$1,422.09 $1,472.09
$1,372.04 $1,401.43
$1,395.77 $1,423.44
$1,409.03 $1,405.64
$1,330.97 $1,346.18
6/30/1984 $1,359.85 $1,396.94
$1,342.99 $1,342.18
$1,491.26 $1,499.34
$1,491.56 $1,497.09
$1,497.37 $1,487.36
$1,480.60 $1,482.16
$1,519.54 $1,533.14
$1,637.91 $1,663.92
$1,657.90 $1,678.23
$1,659.06 $1,691.82
$1,657.56 $1,707.22
$1,753.37 $1,791.90
$1,780.90 $1,867.16
$1,778.23 $1,868.65
$1,763.11 $1,855.20
$1,707.93 $1,766.52
$1,786.83 $1,864.38
$1,909.41 $1,980.35
$2,001.83 $2,078.38
$2,013.04 $2,113.09
$2,163.41 $2,268.61
$2,284.13 $2,378.18
$2,258.32 $2,395.78
$2,378.46 $2,490.17
$2,418.66 $2,556.66
$2,283.45 $2,430.36
$2,452.89 $2,563.06
$2,250.03 $2,360.58
$2,379.86 $2,459.72
$2,437.69 $2,458.74
$2,375.53 $2,415.47
$2,695.51 $2,726.09
$2,801.98 $2,853.13
$2,882.96 $2,920.46
$2,857.30 $2,823.51
$2,882.16 $2,794.42
6/30/1987 $3,027.71 $2,895.58
$3,181.22 $2,976.95
$3,299.88 $3,085.01
$3,227.61 $3,025.16
$2,532.38 $2,310.32
$2,323.71 $2,196.42
$2,500.55 $2,366.20
$2,605.57 $2,474.81
$2,726.99 $2,631.96
$2,642.73 $2,674.60
$2,672.06 $2,688.24
$2,696.64 $2,632.05
$2,818.80 $2,821.82
$2,808.09 $2,745.92
$2,712.90 $2,681.94
$2,828.47 $2,784.39
$2,907.10 $2,803.60
$2,865.53 $2,748.93
$2,915.39 $2,859.99
$3,128.79 $3,055.04
$3,050.88 $3,064.81
$3,121.97 $3,132.85
$3,284.00 $3,302.34
$3,417.00 $3,461.84
$3,397.53 $3,446.26
$3,704.32 $3,651.32
$3,776.56 $3,780.94
$3,761.07 $3,822.91
$3,673.82 $3,661.96
$3,748.76 $3,742.89
$3,838.73 $3,876.51
$3,581.15 $3,548.56
$3,627.35 $3,675.95
$3,723.47 $3,755.35
$3,630.76 $3,609.27
$3,984.76 $3,961.90
6/30/1990 $3,958.06 $3,978.14
$3,945.40 $3,887.04
$3,588.73 $3,484.34
$3,413.96 $3,271.10
$3,399.28 $3,171.33
$3,618.87 $3,476.41
$3,719.84 $3,678.05
$3,881.65 $3,968.61
$4,159.19 $4,324.99
$4,259.84 $4,522.65
$4,270.07 $4,521.29
$4,454.11 $4,729.72
$4,250.11 $4,489.45
$4,448.16 $4,759.72
$4,553.59 $4,932.97
$4,477.54 $4,917.18
$4,537.54 $5,184.19
$4,354.68 $4,937.42
$4,852.85 $5,521.02
$4,762.59 $5,618.75
$4,824.50 $5,708.08
$4,730.91 $5,492.89
$4,870.00 $5,427.52
$4,893.86 $5,479.08
$4,820.94 $5,322.38
$5,018.12 $5,586.37
$4,915.25 $5,452.86
$4,973.25 $5,529.20
$4,990.65 $5,661.35
$5,160.83 $5,977.82
$5,224.31 $6,178.07
$5,268.20 $6,255.30
$5,339.84 $6,167.72
$5,452.51 $6,380.51
$5,320.56 $6,213.34
$5,462.62 $6,496.67
6/30/1993 $5,478.46 $6,529.15
$5,456.55 $6,516.75
$5,663.35 $6,785.89
$5,619.75 $6,857.82
$5,736.07 $6,880.45
$5,681.58 $6,728.39
$5,750.33 $7,040.59
$5,945.84 $7,204.64
$5,784.71 $7,102.33
$5,532.49 $6,773.49
$5,603.31 $6,823.62
$5,695.20 $6,758.79
$5,555.67 $6,526.29
$5,737.90 $6,746.88
$5,973.15 $7,100.41
$5,826.81 $6,967.64
$5,957.91 $7,043.58
$5,741.05 $6,725.92
$5,826.01 $6,787.80
$5,976.91 $6,858.39
$6,210.01 $7,218.45
$6,393.20 $7,336.84
$6,581.16 $7,490.91
$6,844.41 $7,671.44
$7,003.20 $7,983.67
$7,235.70 $8,398.82
$7,253.79 $8,555.88
$7,559.90 $8,762.93
$7,532.69 $8,537.72
$7,864.13 $8,910.82
$8,015.12 $8,888.54
$8,287.63 $9,017.43
$8,364.71 $9,323.12
$8,445.01 $9,435.00
$8,569.99 $9,722.76
$8,791.10 $9,854.02
6/30/1996 $8,824.51 $9,706.21
<CAPTION>
QTLY
<S> <C>
Value
6/30/1981
$890.21
$979.62
$906.78
$909.50
$1,001.43
$1,201.96
$1,357.54
$1,547.69
$1,552.12
$1,515.43
$1,423.44
6/30/1984 $1,396.94
$1,497.09
$1,533.14
$1,691.82
$1,867.16
$1,766.52
$2,078.38
$2,378.18
$2,556.66
$2,360.58
$2,415.47
$2,920.46
6/30/1987 $2,895.58
$3,025.16
$2,366.20
$2,674.60
$2,821.82
$2,784.39
$2,859.99
$3,132.85
$3,446.26
$3,822.91
$3,876.51
$3,755.35
6/30/1990 $3,978.14
$3,271.10
$3,678.05
$4,522.65
$4,489.45
$4,917.18
$5,521.02
$5,492.89
$5,322.38
$5,529.20
$6,178.07
$6,380.51
6/30/1993 $6,529.15
$6,857.82
$7,040.59
$6,773.49
$6,526.29
$6,967.64
$6,787.80
$7,336.84
$7,983.67
$8,762.93
$8,888.54
$9,435.00
6/30/1996 $9,706.21
</TABLE>
Source: Lipper Analytical Services. Past performance is not indicative of future
returns. This chart is for illustrative purposes only and is not intended to
represent the past, present or future performance of any Prudential Mutual Fund.
The Standard & Poor's MidCap 400 Index consists of 400 domestic stocks chosen
for market size (median market capitalization of $676 million), liquidity and
industry group representation. It is a market-value-weighted index (stock price
times shares outstanding) and with each stock affecting the index in proportion
to its market value. The index is comprised of industrials, utilities,
financials and transportation in size order. The Standard & Poor's 500 Stock
Index, a market-value-weighted index made up of 500 of the largest stocks in the
U.S. based on their stock market value. Investors cannot invest directly in
indices.
I-2
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1996. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8%
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3%
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
(1)Lehman Brothers Treasury Bond Index is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5)Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
I-3
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
Average Annual Total Returns of Major World Stock
Markets (1986-1995) (in U.S. dollars)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HONG KONG 23.8%
<S> <C>
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) Used with permission. Morgan
Stanley Country indices are unmanaged indices which include those stocks making
up the largest two-thirds of each country's total stock market capitalization.
Returns reflect the reinvestment of all distributions. This chart is for
illustrative purposes only and is not indicative of the past, present or future
performance of any specific investment. Investors cannot invest directly in
stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
[CHART]
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
I-4
<PAGE>
WORLD STOCK MARKET CAPITALIZATION BY REGION
World Total: $9.2 Trillion
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. 40.8%
<S> <C>
Pacific
Basin 28.7%
Europe 28.3%
Canada 2.2%
</TABLE>
Source: Morgan Stanley Capital International, December 1995. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1579 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)
[CHART]
- -------------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stocks (S&P
500), one-third foreign stocks (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK &
<S> <C> <C> <C>
BOND INDICES OVER THE PAST 20 YEARS
(12/31/75-12/31/95)*
S&P 500 EAFE Lehman Aggregate
37.6% 69.9% 32.6%
-7.2% -23.2% -2.9%
Best Returns Zone
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index
</TABLE>
* Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securities, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.
I-5
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
II-1
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by other sources believed by the Manager to be reliable. Such
information has not been verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.7 million
cars and insures more than 1.4 million homes.
Money Management. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. In July
1995, Institutional Investor ranked Prudential the third largest institutional
money manager of the 300 largest money management organizations in the United
States as of December 31, 1994. As of December 31, 1995, Prudential had more
than $314 billion in assets under management. Prudential Investments (of which
Prudential Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1996, Prudential Investments Fund Management was the
fifteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ---------------
(1)Prudential Investments, a unit of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management Company
serves as the subadviser to Global Utility Fund, Inc., Nicholas-Applegate
Capital Management as the subadviser to Nicholas-Applegate Fund, Inc., Jennison
Associates Capital Corp. as the subadviser to Prudential Jennison Fund, Inc. and
Prudential Active Balanced Fund, a portfolio of Prudential Dryden Fund, Mercator
Asset Management LP, as the subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc., and BlackRock Financial Management,
Inc. as the subadviser to The BlackRock Government Income Trust. There are
multiple subadvisers for The Target Portfolio Trust.
(2)As of December 31, 1994.
III-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
EQUITY FUNDS. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
- ---------------
(3)As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4)Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
(5)Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage funds.
(6)As of December 31, 1994.
III-2
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. In the December
1995 issue of Registered Rep, an industry publication, Prudential Securities
Financial Advisor training programs received a grade of A-(compared to an
industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------------
(7)As of December 31, 1994.
(8)On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research directors,
asking them to evaluate analysts in 76 industry sectors. Scores are produced by
taking the number of votes awarded to an individual analyst and weighting them
based on the size of the voting institution. In total, the magazine sends its
survey to approximately 2,000 institutions and a group of European and Asian
institutions.
III-3
<PAGE>
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial Statements included in the Prospectus constituting Part A of
this Registration Statement:
Financial Highlights.
(2) Financial Statements included in the Statement of Additional Information
constituting Part B of this Registration Statement:
(a) Statement of Assets and Liabilities as of October 21, 1996
(audited).
(b) Report of Independent Auditors.
(c) Portfolio of Investments as of April 30, 1997 (unaudited).
(d) Statement of Assets and Liabilities as of April 30, 1997
(unaudited).
(e) Statement of Operations for the period ended April 30, 1997
(unaudited).
(f) Statement of Changes in Net Assets for the period ended April 30,
1997 (unaudited).
(g) Notes to Financial Statements.
(h) Financial Highlights.
(B) EXHIBITS:
1. (a) Articles of Incorporation.(1)
(b) Articles of Amendment.(2)
2. By-Laws.(2)
3. Not Applicable.
4. Instruments defining rights of shareholders.(2)
5. (a) Form of Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc.(2)
(b) Form of Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.(2)
6. (a) Form of Distribution Agreement between the Registrant and Prudential
Securities Incorporated.(2)
(b) Selected Dealer Agreement.(2)
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.(2)
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.(2)
10. Not Applicable.
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Form of Distribution and Service Plan for Class A Shares.(2)
(b) Form of Distribution and Service Plan for Class B Shares.(2)
(c) Form of Distribution and Service Plan for Class C Shares.(2)
16. Schedule of Computation of Performance Quotations.*
17. Financial Data Schedules filed as Exhibit 27 for electronic purposes.*
C-1
<PAGE>
18. Rule 18f-3 Plan.(2)
- ------------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
N-1A filed on or about September 11, 1996
(File Nos. 333-11785 and 811-07811).
(2) Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to
its Registration Statement on Form N-1A filed on or about October 30, 1996
(File Nos. 333-11785 and 811-07811).
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of May 16, 1997, there were 3,343, 8,258, 479, and 76 record holders of
Class A, Class B, Class C, and Class Z Common Stock of the Fund, respectively.
ITEM 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of the Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 6(a) to
the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant will purchase an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM)
C-2
<PAGE>
and The Prudential Investment Corporation, doing business as Prudential
Investments (PIC), respectively, to liabilities arising from willful
misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard by them of their respective
obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either the
Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office.
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange Commission
staff's position on Section 17(h) advances will be limited in the following
respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including
cost connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance; and
(4) Such surety bond or other insurance must be paid for by the recipient of
such advance.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC
See "Management of the Fund--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
C-3
<PAGE>
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATION
- ------------------------ ------------------------------------ ------------------------------------------------------
<S> <C> <C>
Brian Storms Officer-in-Charge, President, President, Prudential Mutual Funds & Annuities
Chief Executive Officer and (PMF&A); Officer-in-Charge, President, Chief Executive
Chief Operating Officer Officer and Chief Operating Officer, PIFM
Robert F. Gunia Executive Vice President and Comptroller, Prudential Investments; Executive
Treasurer Vice President and Treasurer, PIFM;
Senior Vice President, Prudential Securities
Thomas A. Early Executive Vice President, Vice President and General Counsel, PMF&A;
Secretary and General Executive Vice President, Secretary and
Counsel General Counsel, PIFM
Susan C. Cote Executive Vice President and Vice President of Finance, PMF&A; Executive Vice
Chief Financial Officer President and Chief Financial Officer, PIFM
Neil A. McGuinness Executive Vice President Executive Vice President and Director of
Marketing, PMF&A; Executive Vice
President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice
President, PIFM
</TABLE>
(b) The Prudential Investment Corporation
See "Management of the Fund--Subadviser" in the Prospectus constituting Part
A of this Registration Statement and "Subadviser" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATION
- ------------------------ ------------------------------------ ------------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, President, Chief Executive Officer, Prudential Investments of The
Chief Executive Officer and Director Prudential Insurance Company of America (Prudential)
Jonathan M. Greene Senior Vice President and Director President--Investment Management of Prudential
Investments of Prudential; Senior Vice President and
Director, PIC
John R. Strangfeld, Jr. Vice President and Senior Vice President, Prudential; Vice President and
Director Director, PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for The BlackRock
Government Income Trust, Command Money Fund, Command Government Fund, Command
Tax-Free Fund, The Global Government Plus Fund, Inc., The Global Total Return
Fund, Inc., Global Utility Fund, Inc., Nicholas Applegate Fund, Inc.
(Nicholas-Applegate Equity Fund), Prudential Allocation Fund, Prudential
California Municipal Fund, Prudential Distressed Securities Fund, Inc.,
Prudential Diversified Bond Fund, Inc., Prudential Dryden Fund, Prudential
Emerging Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity
Income Fund,
C-4
<PAGE>
Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Limited Maturity Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund,
Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Jennison Series Fund, Inc.,
Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc.,
Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Small Companies Fund, Inc., Prudential Special Money Market Fund, Prudential
Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Prudential
Utility Fund, Inc., Prudential World Fund, Inc. and The Target Portfolio Trust.
Prudential Securities is also a depositor for the following unit investment
trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trust
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below:
<TABLE>
<CAPTION>
POSITIONS
AND
POSITIONS AND OFFICES
OFFICES WITH WITH
NAME (1) UNDERWRITER REGISTRANT
- --------------------------------- --------------------------------------------- -----------
<S> <C> <C>
Robert Golden.................... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan.................... Executive Vice President and Director None
George A. Murray................. Executive Vice President and Director None
Leland B. Paton.................. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff................ Executive Vice President, Chief Financial None
Officer and Director
Vincent T. Pica, II.............. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons................. Chief Executive Officer, President and None
Director
Lee B. Spencer, Jr............... Executive Vice President, Secretary, General None
Counsel and Director
Brian Storms..................... Director None
751 Broad Street
Newark, NJ 07102
</TABLE>
- ------------------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-5
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey, the Registrant, Gateway Center 3, Newark,
New Jersey, and Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison,
New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and
(11), 31a-1(f), Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway
Center Three, Newark, New Jersey and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "Management of the Fund--Manager"
and "Management of the Fund-- Distributor" in the Prospectus and the captions
"Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKING
Registrant makes the following undertaking:
To furnish each person to whom a Prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders upon request and without
charge.
C-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement under Rule 485(b) under the Securities Act of 1933 and
has duly caused this Post-Effective Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Newark and State of New Jersey, on the 29th day of May, 1997.
PRUDENTIAL EMERGING GROWTH FUND, INC.
By /s/ RICHARD A. REDEKER
------------------------------------------
Richard A. Redeker
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ ROBERT F. GUNIA
- ------------------------------ Director May 29, 1997
Robert F. Gunia
/s/ EDWARD D. BEACH
- ------------------------------ Director May 29, 1997
Edward D. Beach
/s/ DELAYNE DEDRICK GOLD
- ------------------------------ Director May 29, 1997
Delayne Dedrick Gold
/s/ DONALD D. LENNOX
- ------------------------------ Director May 29, 1997
Donald D. Lennox
/s/ DOUGLAS H. MCCORKINDALE
- ------------------------------ Director May 29, 1997
Douglas H. McCorkindale
/s/ MENDEL A. MELZER
- ------------------------------ Director May 29, 1997
Mendel A. Melzer
/s/ THOMAS T. MOONEY
- ------------------------------ Director May 29, 1997
Thomas T. Mooney
/s/ STEPHEN P. MUNN
- ------------------------------ Director May 29, 1997
Stephen P. Munn
/s/ RICHARD A. REDEKER
- ------------------------------ President and Director May 29, 1997
Richard A. Redeker
/s/ ROBIN B. SMITH
- ------------------------------ Director May 29, 1997
Robin B. Smith
/s/ LOUIS A. WEIL, III
- ------------------------------ Director May 29, 1997
Louis A. Weil, III
- ------------------------------ Director May 29, 1997
Clay T. Whitehead
/s/ GRACE C. TORRES Treasurer and Principal
- ------------------------------ Financial and Accounting May 29, 1997
Grace C. Torres Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1. (a) Articles of Incorporation.(1)
(b) Articles of Amendment.(2)
2. By-Laws.(2)
3. Not Applicable.
4. Instruments defining rights of shareholders.(2)
5. (a) Form of Management Agreement between the Registrant and Prudential Mutual Fund Management,
Inc.(2)
(b) Form of Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential
Investment Corporation.(2)
6. (a) Form of Distribution Agreement between the Registrant and Prudential Securities Incorporated.(2)
(b) Selected Dealer Agreement.(2)
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and Trust Company.(2)
9. Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund Services,
Inc.(2)
10. Not Applicable.
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Form of Distribution and Service Plan for Class A Shares.(2)
(b) Form of Distribution and Service Plan for Class B Shares.(2)
(c) Form of Distribution and Service Plan for Class C Shares.(2)
16. Schedule of Computation of Performance Quotations.*
17. Financial Data Schedules filed as Exhibit 27 for electronic purposes.*
18. Rule 18f-3 Plan.(2)
</TABLE>
- ------------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
N-1A filed on or about September 11, 1996
(File Nos. 333-11785 and 811-07811).
(2) Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to
its Registration Statement on Form N-1A filed or about October 30, 1996
(File Nos. 333-11785 and 811-07811).
* Filed herewith.
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
October 25, 1996, relating to the statement of assets and liabilities of
Prudential Emerging Growth Fund, Inc. and to the incorporation by reference
of our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading
"Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants" in such Statement of Additional Information.
PRICE WATERHOUSE LLP
New York, New York
May 29, 1997
<PAGE>
Exhibit 16
PRUDENTIAL EMERGING GROWTH, INC.
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
P (1+T) N = ERV
Where: P = hypothetical initial payment of $1,000 less front end load
of 5% (a) for Class A shares only
T = average annual total return.
n = number of years
ERV = ending redeemable value.
- --------------------------------------------------------------------------------
INCEPTION THROUGH APRIL 30, 1997
----------------------------------------------------
Class A Class B Class C Class Z
------- ------- ------- -------
P = $950 (a) $1,000 $1,000 $1,000
ERV = $853 $892 $932 $946
n = 0.33 0.33 0.33 0.33
T = -10.26% -10.80% -6.80% -5.40%
<PAGE>
Exhibit 16
PRUDENTIAL EMERGING GROWTH FUND, INC.
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T -----------
P
Where: P = hypothetical initial payment of $1,000.
ERV = ending redeemable value.
T = Aggregate total return.
- --------------------------------------------------------------------------------
INCEPTION THROUGH APRIL 30, 1997
----------------------------------------------------
Class A Class B Class C Class Z
------- ------- ------- -------
P = $1,000 $1,000 $1,000 $1,000
ERV = $945 $942 $942 $946
T = -5.50% -5.80% -5.80% -5.40%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001022624
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC.
<SERIES>
<NUMBER> 1
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC. (CLASS A)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 87,682,075
<INVESTMENTS-AT-VALUE> 88,816,018
<RECEIVABLES> 2,361,362
<ASSETS-OTHER> 234,111
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 91,411,491
<PAYABLE-FOR-SECURITIES> 1,653,575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,581,691
<TOTAL-LIABILITIES> 3,235,266
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93,856,370
<SHARES-COMMON-STOCK> 9,351,123
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (401,734)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,412,354)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,133,943
<NET-ASSETS> 88,176,225
<DIVIDEND-INCOME> 90,179
<INTEREST-INCOME> 151,974
<OTHER-INCOME> 0
<EXPENSES-NET> 643,887
<NET-INVESTMENT-INCOME> (401,734)
<REALIZED-GAINS-CURRENT> (6,412,354)
<APPREC-INCREASE-CURRENT> 1,133,943
<NET-CHANGE-FROM-OPS> (5,680,145)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 101,471,348
<NUMBER-OF-SHARES-REDEEMED> (7,714,978)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 88,076,225
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 168,434
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 643,887
<AVERAGE-NET-ASSETS> 24,743,000
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> (0.52)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.45
<EXPENSE-RATIO> 1.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001022624
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC.
<SERIES>
<NUMBER> 2
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC. (CLASS B)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 87,682,075
<INVESTMENTS-AT-VALUE> 88,816,018
<RECEIVABLES> 2,361,362
<ASSETS-OTHER> 234,111
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 91,411,491
<PAYABLE-FOR-SECURITIES> 1,653,575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,581,691
<TOTAL-LIABILITIES> 3,235,266
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93,856,370
<SHARES-COMMON-STOCK> 9,351,123
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (401,734)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,412,354)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,133,943
<NET-ASSETS> 88,176,225
<DIVIDEND-INCOME> 90,179
<INTEREST-INCOME> 151,974
<OTHER-INCOME> 0
<EXPENSES-NET> 643,887
<NET-INVESTMENT-INCOME> (401,734)
<REALIZED-GAINS-CURRENT> (6,412,354)
<APPREC-INCREASE-CURRENT> 1,133,943
<NET-CHANGE-FROM-OPS> (5,680,145)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 101,471,348
<NUMBER-OF-SHARES-REDEEMED> (7,714,978)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 88,076,225
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 168,434
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 643,887
<AVERAGE-NET-ASSETS> 55,047,000
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> (0.53)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.42
<EXPENSE-RATIO> 2.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001022624
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC.
<SERIES>
<NUMBER> 3
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC. (CLASS C)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 87,682,075
<INVESTMENTS-AT-VALUE> 88,816,018
<RECEIVABLES> 2,361,362
<ASSETS-OTHER> 234,111
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 91,411,491
<PAYABLE-FOR-SECURITIES> 1,653,575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,581,691
<TOTAL-LIABILITIES> 3,235,266
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93,856,370
<SHARES-COMMON-STOCK> 9,351,123
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (401,734)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,412,354)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,133,943
<NET-ASSETS> 88,176,225
<DIVIDEND-INCOME> 90,179
<INTEREST-INCOME> 151,974
<OTHER-INCOME> 0
<EXPENSES-NET> 643,887
<NET-INVESTMENT-INCOME> (401,734)
<REALIZED-GAINS-CURRENT> (6,412,354)
<APPREC-INCREASE-CURRENT> 1,133,943
<NET-CHANGE-FROM-OPS> (5,680,145)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 101,471,348
<NUMBER-OF-SHARES-REDEEMED> (7,714,978)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 88,076,225
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 168,434
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 643,887
<AVERAGE-NET-ASSETS> 4,809,000
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> (0.53)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.42
<EXPENSE-RATIO> 2.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001022624
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC.
<SERIES>
<NUMBER> 4
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC. (CLASS Z)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 87,682,075
<INVESTMENTS-AT-VALUE> 88,816,018
<RECEIVABLES> 2,361,362
<ASSETS-OTHER> 234,111
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 91,411,491
<PAYABLE-FOR-SECURITIES> 1,653,575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,581,691
<TOTAL-LIABILITIES> 3,235,266
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93,856,370
<SHARES-COMMON-STOCK> 9,351,123
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (401,734)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,412,354)
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 88,176,225
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<EXPENSES-NET> 643,887
<NET-INVESTMENT-INCOME> (401,734)
<REALIZED-GAINS-CURRENT> (6,412,354)
<APPREC-INCREASE-CURRENT> 1,133,943
<NET-CHANGE-FROM-OPS> (6,680,145)
<EQUALIZATION> 0
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<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 101,471,348
<NUMBER-OF-SHARES-REDEEMED> (7,714,978)
<SHARES-REINVESTED> 0
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<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 168,434
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 643,887
<AVERAGE-NET-ASSETS> 182,000
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> (0)
<PER-SHARE-GAIN-APPREC> (1)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
