<PAGE>
As filed with the Securities and Exchange Commission on October 30, 1998
Registration No. 333-11785
811-07811
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 3 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 4 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL EMERGING 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: (973) 367-7525
MARGUERITE E. H. MORRISON, 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)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/X/ on December 30, 1998 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.
<TABLE>
<S> <C>
Shares of Common Stock, $.001 par value per
Title of Securities Being Registered............ share
</TABLE>
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- --------------------------------------------------------------------------------
<PAGE>
FUND TYPE:
------------------------------------------
STOCK
INVESTMENT OBJECTIVE:
------------------------------------------
LONG-TERM CAPITAL APPRECIATION
PRUDENTIAL EMERGING
GROWTH FUND, INC.
------------------------------------------
PROSPECTUS: DECEMBER __, 1998
As with all mutual funds, filing this prospectus
with the Securities and Exchange Commission
does not mean that the SEC has judged this Fund
a good investment, nor has the SEC determined that
this prospectus is complete or accurate. It is a criminal
offense to state otherwise.
[LOGO]
<PAGE>
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TABLE OF CONTENTS
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<TABLE>
<C> <S>
2 Risk/Return Summary
2 Investment Objective and Principal Strategies
2 Principal Risks
2 Evaluating Performance
4 Shareholder Fees and Expenses
6 How the Fund Invests
6 Investment Objective and Policies
7 Other Investments
7 Derivative Strategies
8 Additional Strategies
9 Investment Risks
12 How the Fund is Managed
12 Manager
12 Investment Adviser
12 Portfolio Manager
12 Distributor
13 Year 2000
14 Fund Distributions and Tax Issues
14 Distributions
14 Tax Issues
16 If You Sell or Exchange Your Shares
17 How to Buy, Sell and Exchange Shares of the Fund
17 How to Buy Shares
23 How to Sell Your Shares
26 How to Exchange Your Shares
28 Financial Highlights
28 Class A and Class B Shares
29 Class C and Class Z Shares
30 The Prudential Mutual Fund Family
</TABLE>
For More Information (Back Cover)
1
<PAGE>
RISK / RETURN SUMMARY
This section highlights key information about the Prudential Emerging Growth
Fund, Inc., which we refer to as "the Fund." Additional information follows
this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is long-term capital appreciation, which means we
seek investments whose price will increase over several years. We normally
invest at least 65% of the Fund's total assets in equity securities of small
and medium-sized U.S. companies.
WE'RE GROWTH INVESTORS
In deciding which stocks to buy, we use what is known
as a growth investment style. This means we invest in stocks of companies
that we believe are experiencing superior absolute and relative earnings
growth or offer the possibility of a superior return. Using this approach, we
seek reasonable growth with an eye toward minimizing risk.
To achieve our capital appreciation objective, we look for securities
that have the potential for above-average growth. While we make every effort
to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the
Fund invests primarily in stocks, there is the risk that the price of
particular stocks we own could go down, or the value of the equity markets or
a sector of them could go down. Generally, the stock price of small and
medium-sized companies varies more than the price of large company stocks and
may present above average risks. This means that when stock prices decline
overall, the Fund may decline more than the Standard & Poor's 500 Stock Price
Index (S&P 500 Index). Also, the companies that we invest in generally
reinvest their earnings rather than distribute them to shareholders. As a
result, the Fund is not likely to receive significant dividend income on its
portfolio securities.
Some of our investment strategies - as well as foreign investments that
we may make - also involve risk. Like any mutual fund, an investment in the
Fund could lose value, and you could lose money. For more information about
the risks associated with the Fund, see "Investment Risks." The Fund does
not represent a complete investment program.
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Fund performs. The
following bar chart and table show the Fund's performance since it began and
demonstrate how returns can change. Past performance does not mean that the
Fund will achieve similar results in the future.
2
<PAGE>
ANNUAL RETURNS Class A shares(1)
(as percent)
1997: 19.20
1998: ____
[ Bar Chart Here]
Best Quarter: ___% (__ quarter of 199_) Worst Quarter: _____% (___ quarter
of 199_)
_____
(1) These annual returns do not include sales charges. If the sales charges
were included, the annual returns would be lower than those shown. The total
return of the Class A shares from 1-1-98 to 9-30-98 was __%.
AVERAGE ANNUAL RETURNS AS OF 12-31-97(1)
<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares % % (since 12-31-96)
Class B shares % % (since 12-31-96)
Class C shares % % (since 12-31-96)
Class Z shares % % (since 12-31-96)
S&P Mid-Cap 400(2) % n/a
Lipper Average(3) % n/a
</TABLE>
(1) The Fund's returns are after deduction of sales charges and
expenses.
(2) The Standard & Poor's Mid-Cap 400 Stock Index (S&P Mid-Cap) - an
unmanaged index of 400 domestic stocks chosen for market size,
liquidity and industry group representation - gives a broad look
at how mid-cap stock prices have performed. These returns do not
include the effect of any sales charges. These returns would be
lower if they included the effect of sales charges. S&P Mid-Cap
since inception returns are _% for Class A, _% for Class B, _%
for Class C and _% for Class Z shares.
(3) The Lipper Average is based on the average return of all mutual
funds in the Lipper Mid-Cap Funds category and does not include
the effect of any sales charges. Again, these returns would be
lower if they included the effect of sales charges. Lipper since
inception returns are _% for Class A, ____ % for Class B, _% for
Class C and _% for Class Z shares.
3
<PAGE>
SHAREHOLDER FEES AND EXPENSES
This table shows the sales charges, fees and expenses for each share class of
the Fund-Class A, B, C and Z. Each share class has different sales charges-known
as loads-and expenses, but represents an investment in the same fund. Class Z
shares are available only to a limited group of investors. For more information
about which share class may be right for you, see "How to Buy, Sell and Exchange
Shares of the Fund."
SHAREHOLDER FEES(1) (paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
<S> <C> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering price) 5% None 1% None
Maximum deferred sales charge
(load) (as a percentage of
the lower of original
purchase price or sale
proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
Maximum account fee None None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (deducted from Fund assets)
Class A Class B Class C Class Z
<S> <C> <C> <C> <C>
Management fees .60% .60% .60% .60%
+ Distribution (12b-1) and
service fees .30%(4) 1.00% 1.00% None
+ Other expenses ___% ___% ___% ___%
= Total annual Fund operating ___% ___% ___% ___%
expenses
</TABLE>
(1) The maximum sales charges permitted by the National Association of
Securities Dealers, Inc. may not exceed 6.25% of total gross sales per
class. Because of 12b-1 fees, long-term shareholders may pay more than
6.25% of their investment in shares of the Fund. Your broker may charge
you a separate or additional fee for purchases and sales of shares.
(2) The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
4
<PAGE>
(3) The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
(4) The Distributor of the Fund has voluntarily reduced its distribution and
service fees for Class A shares to .25 of 1% of the average daily net
assets of the Class A shares. This voluntary reduction may be terminated at
any time without notice. With this reduction, Total annual Fund operating
expenses are __%.
FEES AND EXPENSES EXAMPLE
This example will help you compare the fees and expenses of the Fund's
different share classes.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 yr 3 yrs 5 yrs 10 yrs
Class A shares
Class B shares
Class C shares
Class Z shares
You would pay the following expenses on the same investment if you did not sell
your shares:
1 yr 3 yrs 5 yrs 10 yrs
Class A shares
Class B shares
Class C shares
Class Z shares
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is LONG-TERM CAPITAL APPRECIATION. This means we
seek investments whose price will increase over several years. While we make
every effort to achieve our objective, we can't guarantee success.
In pursuing our objective, we normally invest primarily (at least 65% of the
Fund's total assets) in EQUITY SECURITIES OF SMALL AND MEDIUM-SIZED U.S.
COMPANIES with the potential for above-average growth. We consider small and
medium-sized companies to be those with market capitalizations between $500
million and $4.5 billion at the time of initial purchase.
OUR GROWTH STRATEGY
We look for small and medium-sized companies that have growth in sales and
earnings driven by products or services. These companies usually have a unique
market niche, a strong new product profile or superior management. We analyze
companies using both fundamental and/or quantitative techniques.
In addition to buying stocks, the Fund may invest in other equity-related
securities. Equity-related securities are common stock, preferred stock,
warrants and rights that can be exercised to obtain stock, investments in
various types of business ventures, including partnerships and joint ventures
and securities - like American Depository Receipts (ADRs) which are certificates
representing the right to receive foreign securities that have been deposited
with a U.S. bank (or a foreign branch of a U.S. bank).
We may also buy convertible securities. These are securities-like bonds,
corporate notes and preferred stock - that can be converted into the company's
common stock or some other equity security. The Fund will only invest in
investment grade convertible securities. Generally, we consider selling a
security when we think it has increased in price to the point where it is no
longer underpriced in the opinion of the investment adviser.
For more information, see the "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information - which we refer to as the SAI -
contains additional information about the Fund. To obtain a copy, see the back
cover page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.
6
<PAGE>
OTHER INVESTMENTS
We may also use the following investment strategies to increase the Fund's
returns or protect its assets if market conditions warrant.
Under normal circumstances, the Fund may also invest up to 35% of total assets
in:
- equity securities of other companies (not in the $500 million to $4.5
billion range)
- foreign securities, both equity securities and fixed-income
obligations
- fixed-income obligations, including bonds and money market instruments
- U.S. government or government agency obligations
FOREIGN SECURITIES
The Fund can invest up to 35% of total assets in stocks and other equity-related
securities and money market instruments and other investment-grade fixed-income
securities of FOREIGN ISSUERS, including those in developing countries. For
these purposes, we do not consider ADRs and other similar receipts or shares to
be foreign securities.
FIXED-INCOME OBLIGATIONS, INCLUDING MONEY MARKET INSTRUMENTS AND BONDS
Money market instruments include the commercial paper of corporations, the
obligations of banks, certificates of deposit and obligations issued or
guaranteed by the U.S. government or its agencies or a foreign government.
Fixed-income obligations include bonds and notes and the Fund can invest up to
35% of total assets in either corporate or government obligations. Generally,
fixed-income securities provide a fixed rate of return, but provide less
opportunity for capital appreciation than investing in stocks.
If we believe it is necessary, we may temporarily invest up to 100% of the
Fund's assets in money market instruments. Investing heavily in these
securities limits our ability to achieve capital appreciation but can help to
preserve the Fund's assets when the equity markets are unstable.
The Fund will purchase only money market instruments in one of the two highest
short-term quality ratings of a nationally recognized statistical rating
organization (NRSRO). For bonds and other long-term fixed-income obligations,
we invest in obligations in one of the top four long-term quality ratings
(Baa/BBB or better.) We may also invest in obligations that are not rated, but
which we believe to be of comparable quality. Obligations rated in the fourth
category (Baa/BBB) have speculative characteristics. These lower-rated
obligations are subject to a greater risk of loss of principal and interest.
7
<PAGE>
DERIVATIVE STRATEGIES
We may use a number of alternative investment strategies - including DERIVATIVES
- - to try to improve the Fund's returns or protect its assets, although we cannot
guarantee they will work. Derivatives - such as futures, options, forward
foreign currency exchange contracts and options on futures - involve costs and
can be volatile. With derivatives, the investment adviser tries to predict
whether the underlying investment, a security, market index, currency, interest
rate or some other investment, will go up or down at some future date. We may
use derivatives to try to reduce risk or to increase return consistent with the
Fund's overall investment objective. Any derivatives we may use may not match
the Fund's underlying holdings. For more information about these strategies, see
the SAI, "Description of the Fund, Its Investments and Risks - Hedging and
Return Enhancement Strategies."
ADDITIONAL STRATEGIES
The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.
The Fund also follows certain policies when it: BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 33-1/3% of the value of its total assets,
including collateral received in the transaction); and holds ILLIQUID SECURITIES
(the Fund may hold up to 15% of its net assets in illiquid securities, including
restricted securities, those without a readily available market and repurchase
agreements with maturities longer than seven days). The Fund is subject to
certain investment restrictions that are fundamental policies, and cannot be
changed without shareholder approval. For more information about these
restrictions, see the SAI.
PORTFOLIO TURNOVER
As a result of the strategies described above, the Fund may have a portfolio
turnover rate of up to 200%. Portfolio turnover is generally the percentage
found by dividing the lesser of portfolio purchases or sales by the monthly
average value of the portfolio. It can result in higher brokerage commissions
and other transaction costs. It can also result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
8
<PAGE>
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. This chart outlines the key risks and potential rewards of the Fund's
principal investments. See, too, "Description of the Fund, Its Investments and
Risks" in the SAI.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INVESTMENT TYPE RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
STOCKS OF SMALL AND -Individual stocks could -Historically, stocks
MEDIUM - SIZED U.S. lose value have out-performed
COMPANIES other investments over
-The equity markets could the long term
At least 65% go down
-Generally, economic
-Stocks of small and growth means higher
medium- sized companies corporate profits,
are more which leads to an
volatile and may decline increase in stock
more than those in the prices, known as
S&P 500 Index capital appreciation
-Smaller companies are -Highly successful
more likely to reinvest smaller companies can
earnings and not pay outperform larger ones
dividends
-Generally, the
-Changes in interest rates securities of small and
may affect the securities medium - sized
of small and medium sized companies recover more
companies more than the quickly than those of
securities of larger larger issuers
companies
-Changes in economic or
political conditions,
both domestic and
international
- -------------------------------------------------------------------------------
STOCKS OF LARGER U.S. -Similar risks to small -May preserve capital
COMPANIES and medium sized U.S. appreciation
companies
Up to 35%
-May not recover as
quickly as smaller
companies after a market
decline
<PAGE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INVESTMENT TYPE RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
FIXED-INCOME OBLIGATIONS -Credit risk--the risks -Regular interest income
that the borrower can't
Up to 35% under pay back the money -Generally more secure
normal conditions borrowed or make interest than stock since
payments companies must pay
their debts before they
-Market risk--the risk pay dividends
that bonds or other debt
instruments may lose
value in the market
because interest rates
change or there is a
lack of confidence in
the borrower
- -------------------------------------------------------------------------------
FOREIGN SECURITIES -Foreign markets, -Investors can
economies and political participate in the
Up to 35% systems may not be as growth of foreign
stable as in the U.S., markets and companies
particularly those in operating in those
developing countries markets
-May be less liquid than -Diversification
U.S. stocks or bonds
-Differences in foreign
laws, accounting
standards and public
information
-Currency risk
10
<PAGE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INVESTMENT TYPE RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
DERIVATIVES -Generally involves trying -One way to manage the
to predict whether the Fund's risk/return
Percentage varies underlying security, balance by locking in
market index, currency or the value in investment
interest rate will ahead of time
increase or decrease
at some future date -Source of Income
-If the investment adviser
predicts wrong, the Fund
can lose money
-Using derivatives costs
money
- -------------------------------------------------------------------------------
ILLIQUID SECURITIES -May be difficult to value -May offer a more
and sell attractive yield or
Up to 15% of net assets potential for growth
-Could result in losses than more liquid
securities
- -------------------------------------------------------------------------------
U.S. GOVERNMENT -Not all are insured or -May preserve the Fund's
SECURITIES guaranteed by the assets
government but only by
Up to 35% the issuing agency
-Limits potential for
capital appreciation
- -------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -Limits potential for -May preserve the
capital appreciation Fund's assets
Up to 100% on a
temporary basis -See Credit risk and
Market risk
</TABLE>
11
<PAGE>
HOW THE FUND IS MANAGED
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended October 31, 1998, the Fund paid PIFM management fees of .60% of the Fund's
average net assets.
As of November 30, 1998, PIFM served as the Manager to all __ of the
Prudential Mutual Funds, and as Manager or administrator to __ closed-end
investment companies, with aggregate assets of approximately $__ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, known as Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102. PIFM has responsibility for all investment advisory
services, supervises Prudential Investments and reimburses Prudential
Investments for its reasonable costs and expenses.
PORTFOLIO MANAGER
Susan Hirsch, a Managing Director of Prudential Investments, has managed the
Fund since it began. Ms. Hirsch joined Prudential Investments in July 1996.
Before that she was employed by Lehman Brothers Global Asset Management from
1988-1996 and Delphi Asset Management in 1996. She managed growth stock
portfolios at both firms. During this time, Susan Hirsch was named as an
Institutional Investor All-American Research Team Analyst for small growth
stocks in 1991, 1992 and 1993.
As a growth investor, Ms. Hirsch seeks companies that will produce superior
earnings over the long term.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees - known as
12b - 1 fees-are shown in the "Shareholder Fees and Expenses" table.
12
<PAGE>
YEAR 2000
Many computer systems used today cannot distinguish the year 2000 from the year
1900 because of the way dates are encoded. This could be a problem when the year
2000 arrives and could affect securities trades, interest and dividend payments,
pricing and account services. Although we cannot guarantee that this will not be
a problem, the Fund's service providers have been working on adapting their
computer systems. They expect that their systems, and the systems of their
service providers, will be ready for the year 2000.
In addition, issuers of securities may also encounter year 2000 compliance
problems. If these problems are significant and are not corrected, securities
markets could go down or issuers could have poor performance. If the Fund owns
these securities, then it is possible that the Fund could lose money.
13
<PAGE>
FUND DISTRIBUTIONS AND TAX ISSUES
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS and CAPITAL GAINS, if any,
to shareholders. These distributions are subject to taxes, unless you hold your
shares in a 401(k) plan, an Individual Retirement Account (IRA) or some other
qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless your shares are
held in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues
you should be aware of, but is not meant to be tax advice. For tax advice,
please speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders,
typically every year. For example, if the Fund owns ACME Corp. stock and the
stock pays a dividend, the Fund will pay out a portion of this dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income,
whether or not they are reinvested in the Fund.
The Fund also distributes CAPITAL GAINS to shareholders - typically once a
year - which are generated when the Fund sells its assets for a profit. For
example, if the Fund bought 100 shares of ACME Corp. stock for a total of $1,000
and later sold the shares for a total of $1,500, the Fund has capital gains of
$500, which it will pass on to shareholders (assuming the Fund's total gains are
greater than any losses it may have). Capital gains are taxed differently
depending on how long the Fund holds the security - the longer a security is
held before it is sold, the lower the capital gains tax rate, up to a point.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
FORM 1099
During the tax season every year, you will receive a Form 1099, which reports
the amount of dividends and capital gains we distributed to you during the prior
year. If you own shares of the Fund as part of a qualified tax-deferred plan or
account, your taxes are deferred, so you will not
14
<PAGE>
receive a Form 1099. However, you will receive a Form 1099 when you take any
distributions from your qualified tax-deferred plan or account.
Fund distributions are generally taxable to you in the year they are received,
except when we declare certain dividends in the fourth quarter and actually pay
them in January of the following year. In such cases, the dividends are treated
as if they were paid on December 31 of the prior year. Corporate shareholders
are eligible for the 70% dividends-received deduction for certain dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions and sale
proceeds. If you are subject to backup withholding, we will withhold and pay to
the U.S. Treasury 31% of your distributions. Dividends of net investment income
and short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to you
as a shareholder of record. As explained above, the distribution may be subject
to income or capital gains taxes. You may think you've done well, since you
bought shares one day, and soon after received a distribution. That is not so
because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend and the market changes (if any) to
reflect the payout. The distribution you receive makes up for the decrease in
share value. However, the timing of your purchase does mean that part of your
investment came back to you as taxable income.
RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts - available to certain taxpayers beginning in 1998
- - contributions are not tax deductible, but distributions from the plan may be
tax-free. Please contact your broker or a Prudential professional for
information on a variety of retirement plans offered by Prudential.
15
<PAGE>
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified
tax-deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
CAPITAL GAIN
$ (taxes owed)
RECEIPTS
from SALE OR
CAPITAL LOSS
(offset against
gain)
EXCHANGING your shares of the Fund for the shares of another Prudential
Mutual Fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell - or exchange - Fund shares,
as well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares - which happens automatically approximately seven years after
purchase - is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the IRS. For
more information about the automatic conversion of Class B shares, see "Class B
Shares Convert to Class A Shares After Approximately Seven Years" in the next
section.
16
<PAGE>
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the sale of Fund
shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within certain time periods (that is why it is called a
Contingent Deferred Sales Charge, or CDSC), but the operating expenses each year
are higher than the Class A share expenses. With Class C shares, you pay a low
front-end sales charge and a low CDSC, but the operating expenses are also
higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
- - The amount of your investment
- - The length of time you expect to hold the shares
- - The different sales charges that apply to each share class-Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front- end
sales charge and low CDSC.
- - Whether you qualify for any reduction or waiver of sales charges
- - The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
- - Whether you qualify to purchase Class Z shares
17
<PAGE>
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
<S> <C> <C> <C> <C>
Minimum purchase amount(1) $1,000 $1,000 $2,500 None
Minimum amount for
subsequent purchases(1) $100 $100 $100 None
Maximum initial sales charge 5% of the public None 1% of the public None
offering price offering price
Contingent Deferred Sales
Charge (CDSC)(2) None If sold during: 1% on sales made None
Year 1 5% within 18 months of
Year 2 4% purchase(2)
Year 3 3%
Year 4 2%
Year 5/6 1%
Year 7 0%
Annual distribution (12b-1) .30 of 1% (.25 1% 1% None
and service fees (shown as a of 1% currently)
percentage of average net
assets)(3)
</TABLE>
(1) The minimum investment requirements do not apply to certain retirement
and employee savings plans and custodial accounts for minors. The minimum
initial and subsequent investment for purchases made through the Automatic
Investment Plan is $50. For more information, see "Additional Shareholder
Services-Automatic Investment Plan."
(2) For more information about the CDSC and how it is calculated, see
"Contingent Deferred Sales Charges (CDSC)." Class C shares bought before
November 2, 1998 have a 1% CDSC if sold within one year.
(3) These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
18
<PAGE>
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales charge by
increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
Sales charge as % Sales charge as % Dealer
Amount of purchase of offering price of amount invested reallowance
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above(1) None None None
</TABLE>
(1) If you invest $1 million or more, you can buy only Class A shares, unless
you qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
- - invest with an eligible group of related investors;
- - buy the Class A shares of two or more Prudential Mutual Funds at the same
time;
- - use your RIGHTS OF ACCUMULATION, which allow you to combine the value of
Prudential Mutual Fund shares you already own with the value of the shares
you are purchasing for purposes of determining the applicable sales charge;
or
- - sign a LETTER OF INTENT, stating in writing that you or an eligible group
of related investors will purchase a certain amount of shares in the Fund
and other Prudential Mutual Funds within 13 months.
BENEFIT PLANS. 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-which we call BENEFIT PLANS-can avoid Class A's initial sales charges if
the Benefit Plan has existing assets of at least $1 million invested in shares
of Prudential Mutual Funds (excluding money market funds other than those
acquired under the exchange privilege) or 250 eligible employees or
participants. Class A shares may also be purchased without a sales charge by
participants who are repaying loans from Benefit Plans where
19
<PAGE>
Prudential (or its affiliates) provides administrative or recordkeeping
services, sponsors the product or provides account services.
Certain Prudential retirement programs - such as PruArray Association
Benefit Plans and PruArray Savings Programs - may also be exempt from Class A's
sales charges. For more information, see the SAI or contact your Prudential
professional. In addition, waivers are available to investors in certain
programs sponsored by brokers, investment advisers and financial planners who
have agreements with Prudential Investments Advisory Group relating to:
- - Mutual fund "wrap" or asset allocation programs where the sponsor places Fund
trades and charges its clients a management, consulting or other fee for its
services;
- - Mutual fund "supermarket" programs where the sponsor links its customers'
accounts to a master account in the sponsor's name; or
- - Retirement programs where Prudential provides no administrative services.
OTHER TYPES OF INVESTORS. Other investors may pay no sales charges,
including certain officers, employees or agents of Prudential and its
affiliates, Prudential Mutual Funds, the subadvisers of the Prudential Mutual
Funds and of brokers that have entered into a selected dealer agreement with
the Distributor. To qualify for a reduction or waiver of sales charges, you
must notify the Transfer Agent or your broker at the time of purchase. For
more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares - Reduction and Waiver of Initial Sales Charges - Class A Shares."
Waiving Class C's Initial Sales Charge
[Prudential Retirement Plans. The initial sales charge will be waived for
purchases of Class C shares by both qualified and non-qualified retirement and
deferred compensation plans participating in the PruArray Plan if Prudential
also provides administrative or recordkeeping services.
Investments of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. Such purchases must be made
within 60 days of the redemption. If you are entitled to the waiver, you must
notify either the Transfer Agent or your broker. The Transfer Agent may require
any supporting documents it considers to be appropriate.]
20
<PAGE>
QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
- - Any Benefit Plan as defined above, and certain nonqualified plans, provided
the Benefit Plan-in combination with other plans sponsored by the same
employer or group of related employers-has at least $50 million in defined
contribution assets
- - Participants in any fee-based program sponsored by Prudential or an
affiliate which includes mutual funds as investment options and the Fund as
an available option
- - 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 option
- - Benefit Plans for which an affiliate of the Distributor serves as
recordkeeper and as of September 20, 1996 were either Class Z shareholders
of the Prudential Mutual Funds or executed a letter of intent to purchase
Class Z shares of the Prudential Mutual Funds
- - Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund)
- - Employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan
- - Prudential with an investment of $10 million or more
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the
number of Class B shares converted if the price of the Class A shares is higher
than the price of Class B shares. The total dollar value will be the same, so
you will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares -
Conversion Feature - Class B Shares."
21
<PAGE>
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value.
The share value of a mutual fund-known as the NET ASSET VALUE or NAV - is
determined by a simple calculation - it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund-or the NAV - is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to price mutual funds daily.
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock
in its portfolio and the price of ACME stock goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
We determine the NAV of our shares once each business day at 4:15 p.m. New York
Time on days that the New York Stock Exchange is open for trading. We do not
determine NAV on days when we have not received any orders to purchase, sell or
exchange, or when changes in the value of the Fund's portfolio do not materially
affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND? For Class A and Class C shares,
you'll pay the public offering price, which is NAV next determined after we
receive your order to purchase, plus an initial sales charge (unless you're
entitled to a waiver). For Class B and Class Z shares, you will pay the NAV next
determined after we receive your order to purchase (remember, there are no
up-front sales charges for these share classes). Your broker may charge you a
separate or additional fee for purchases of shares.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out - or distributes - its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends:
22
<PAGE>
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement
plans for individuals and institutions, including large and small businesses.
For information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person
business, please contact your broker or a Prudential professional. If you are
interested in opening a 401(k) or other company-sponsored retirement plan
(SIMPLES, SEP plans, Keoghs, 403(b)(7) plans, pension and profit-sharing plans),
your broker or a Prudential professional will help you determine which
retirement plan best meets your needs. Complete instructions about how to
establish and maintain your plan and how to open accounts for you and your
employees will be included in the retirement plan kit you receive in the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance -which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market downturns - is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and
is not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund-also known as redeeming your shares-the price
you will receive will be the NAV next determined after the Transfer Agent, the
Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York time to
process the sale on that day. Otherwise, contact:
23
<PAGE>
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days after
the Transfer Agent receives your sell order. If you hold shares through a
broker, payment will be credited to your account. If you are selling shares you
recently purchased with a check, we may delay your sale until your check clears,
which can take up to 10 days. Your broker may charge you a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. If you invest by check, we will only
process your redemptions after your check clears. This can take up to 10
calendar days. You can avoid delay if you purchase shares by wire, certified
check or cashier's check. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares - Restrictions on Sales."
If you hold your shares directly with the Transfer Agent, you may have to have
the signature on your sell order guaranteed by a financial institution. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares -
Sale of Shares - Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGES (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (1 year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
- - Amounts representing shares you purchased with reinvested dividends and
distributions
- - Amounts representing the increase in NAV above the total amount of payments
for shares made during the past six years
- - Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares)
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid - or at least
minimize-the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to the value of your oldest
shares first. To value these shares, we will use the original purchase price or
the current value, whichever is less.
24
<PAGE>
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2%
in the fourth and 1% in the fifth and sixth years. The rate decreases on the
first day of the month following the anniversary date of your purchase, not
on the anniversary date itself. The CDSC of 1% for Class C shares - which is
applied to shares sold within 18 months of purchase (one year for Class C
shares purchased before November 2, 1998) - is the lesser of the original
purchase price or the redemption proceeds. For purposes of determining how
long you've held your shares, all purchases during the month are grouped
together and considered to have been made on the last day of the month.
The CDSC will be calculated from the first day of the month after initial
purchase, excluding any time shares were held in a money market fund.
WAIVER OF THE CDSC-CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
- - After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the
death or disability
- - To provide for certain distributions-made without IRS penalty-from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
- - On certain sales from a Systematic Withdrawal Plan
For more information, see the SAI, "Purchase, Redemption and Pricing of
Fund Shares - Waiver of Contingent Deferred Sales Charges-Class B Shares."
WAIVER OF THE CDSC - CLASS C SHARES
[The CDSC will be waived for purchases of Class C shares by both qualified and
nonqualified retirement and deferred compensation plans participating in the
PruArray Plan if Prudential also provides administrative or recordkeeping
services.]
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
25
<PAGE>
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate numbers of shares
to reflect the amount of the CDSC you paid. In order to take advantage of this
privilege, you must notify the Transfer Agent or your broker at the time of the
repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund Shares -
Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in
certain other Prudential Mutual Funds-including certain money market funds - if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential Mutual Fund,
but you can't exchange Class A shares for Class B, Class C or Class Z shares.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. We may change the terms of the
exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX: 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange - and
then sell - Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B shares into a money
market fund, the time you hold the shares in the money market account will not
be counted for purposes of calculating the required holding period for CDSC
liability.
26
<PAGE>
Remember, as we explained in the section entitled "If You Sell or Exchange
Your Shares," exchanging shares is considered a sale for tax purposes.
Therefore, if the shares you exchange are worth more than you paid for them, you
may have to pay capital gains tax. For additional information about exchanging
shares, see the SAI, "Shareholder Investment Account - Exchange Privilege."
[If you own Class B or Class C shares and qualify to purchase either Class
A shares without paying an initial sales charge or Class Z shares, we will
automatically exchange your Class B or Class C shares which are not subject to a
CDSC for Class A or Class Z shares, as appropriate. We make such exchanges on a
quarterly basis, if you notify the Transfer Agent that you qualify for this
exchange privilege. We have obtained legal opinion that this exchange is not a
"taxable event" for federal income tax purposes. This opinion is not binding on
the IRS.]
FREQUENT TRADING
You should not use the Fund for frequent trading in response to short-term
changes in the market. Doing this makes it harder for us to efficiently manage
the Fund, and it also increases transaction costs. If we believe you are engaged
in this kind of trading, we reserve the right to refuse any of your purchase
orders or exchanges. The Fund will reject all exchanges and purchases from any
person or group that we believe is following a market timing strategy unless we
have an agreement to follow certain procedures, including a daily dollar limit
on trading.
27
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and reports of independent
accountants which appear in the SAI and are available upon request. Additional
performance information for each share class is contained in the annual report,
which you can receive at no charge.
CLASS A AND CLASS B SHARES
The financial highlights were audited by LLP, whose report was unqualified.
CLASS A AND CLASS B SHARES (FISCAL PERIODS ENDED 10-31-98)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE CLASS A CLASS B
- -------------------------------------------------------------------------------------------------------------
1998 1997(1) 1998 1997(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $______ $10.00 $______ $10.00
Income from investment operations:
Net investment income (loss) ___ (.08) ___ (.14)
Net realized and unrealized gain (loss) ___ 2.00 ___ 1.99
on investment transactions
Total from investment operations ___ 1.92 1.85
- -------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income
Distributions from net realized gains
Total distributions
Net asset value, end of period $______ $11.92 $_______ $11.85
Total return(2) ___% 19.20% % 18.50%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $_______ $33,124 $_______ $82,070
Average net assets (000) $_______ $28,141 $_______ $67,420
Ratios to average net assets(3):
Expenses, including distribution fees ___% 1.46% ___% 2.21%
Expenses, excluding distribution fees ___% 1.21% ___% 1.21%
Net investment income (loss) ___% (.92)% ___% (1.67)%
Portfolio turnover ___% 107% ___% 107%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INFORMATION SHOWN IS FOR THE PERIOD 12-31-96 (WHEN SHARES WERE FIRST
OFFERED) THROUGH 10-31-97.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS
CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE
LAST DAY OF EACH PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN
A FULL YEAR ARE NOT ANNUALIZED.
(3) ANNUALIZED.
28
<PAGE>
CLASS C AND CLASS Z SHARES
The financial highlights were audited by LLP, whose
report was unqualified.
CLASS C AND CLASS Z SHARES (FISCAL PERIODS ENDED 10-31-98)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE CLASS A CLASS B
- -------------------------------------------------------------------------------------------------------------
1998 1997(1) 1998 1997(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $_____ $10.00 $______ $10.00
Income from investment operations:
Net investment income (loss) ___ (.14) ___ (.03)
Net realized and unrealized gain (loss) ___ 1.99 ___ 1.96
on investment transactions
Total from investment operations 1.85 1.93
- -------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income
Distributions from net realized gains
Total distributions
Net asset value, end of period $_____ $11.85 $______ $11.93
Total return(2) % 18.50% % 19.30%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $______ $6,477 $______ $561
Average net assets (000) $______ $5,526 $______ $261
Ratios to average net assets(3):
Expenses, including distribution fees ___% 2.21% ___% 1.21%
Expenses, excluding distribution fees ___% 1.21% ___% 1.21%
Net investment income (loss) ___% (1.69)% ___% (.73)%
Portfolio turnover ___% 107% ___% 107%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INFORMATION SHOWN IS FOR THE PERIOD 12-31-96 (WHEN SHARES WERE FIRST
OFFERED) THROUGH 10-31-97.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS
CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE
LAST DAY OF EACH PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN
ONE YEAR ARE NOT ANNUALIZED.
(3) ANNUALIZED.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your broker or
Prudential professional or call us at (800) 225-1852. Please read the
prospectus carefully before you invest or send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL UTILITY FUND, INC.
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth Equity Fund
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
30
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
Limited Maturity Portfolio
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Short-Intermediate Term Series
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Income Portfolio
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
31
<PAGE>
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
Money Market Series
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Money Market Series
PRUDENTIAL MUNICIPAL SERIES FUND
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
Institutional Money Market Series
32
<PAGE>
FOR MORE INFORMATION
Please read this prospectus before you invest in the
Fund and keep it for future reference. For information
or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- ------------------------------------------------------------------------
Brokers should contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 225-1852
- ------------------------------------------------------------------------
Visit Prudential's web site at HTTP://WWW.PRUDENTIAL.COM
- ------------------------------------------------------------------------
Additional information about the Fund can be obtained
without charge and can be found in the following
documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and
investment strategies that significantly affected the
Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the
Securities and Exchange Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room
in Washington, DC
(For hours of operation, call 1(800) SEC-0330.)
Via the Internet:
http://www.sec.gov
- ------------------------------------------------------------------------
CUSIP Numbers:
Class A: 74431L-10-7
Class B: 74431L-20-6
Class C: 74431L-30-5
Class Z: 74431L-40-4
Investment Company Act File No: 811-07811
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 30, 1998
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 with the
potential for above-average growth. These companies will generally have a market
capitalization ranging from $500 million to $4.5 billion. The Fund may also
invest in (1) equity-related securities of other companies, including foreign
issuers, (2) investment grade debt securities, including foreign issuers, and
(3) 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 equity securities, 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 "Description of the Fund, Its Investments and Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Prudential Emerging Growth Fund, Inc.
dated December 30, 1998, a copy 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>
Fund History.......................................... B-2
Description of the Fund, Its Investments and Risks.... B-2
Investment Restrictions............................... B-17
Management of the Fund................................ B-19
Control Persons and Principal Holders of Securities... B-22
Investment Advisory and Other Services................ B-22
Brokerage Allocation and Other Practices.............. B-26
Capital Shares, Other Securities and Organization..... B-28
Purchase, Redemption and Pricing of Fund Shares....... B-29
Shareholder Investment Account........................ B-39
Net Asset Value....................................... B-43
Taxes, Dividends and Distributions.................... B-44
Performance Information............................... B-46
Financial Statements.................................. B-48 --
Report of Independent Accountants..................... B-56 --
Appendix I--General Investment Information............ I-1 --
Appendix II--Historical Performance Data.............. II-1 --
Appendix III--Information Relating to Prudential...... III-1 --
</TABLE>
- --------------------------------------------------------------------------------
MF173B
<PAGE>
FUND HISTORY
The Fund was incorporated in Maryland on August 23, 1996.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Fund is a diversified open-end management
investment company.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's
investment objective 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 with the potential for above-average growth.
These companies will generally have a market capitalization ranging from $500
million to $4.5 billion. The Fund may also invest in (1) equity securities of
other companies including foreign issuers, (2) investment grade debt securities,
including foreign issuers, and (3) obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. The Fund may engage in various
derivative transactions, such as options on equity securities, 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.
While the principal investment policies and strategies for seeking to
achieve this objective are described in the Fund's Prospectus, the Fund may from
time to time also use the securities, instruments, policies and strategies
described below in seeking to achieve its objective. The Fund may not be
successful in achieving its objective and you could lose money.
EQUITY AND EQUITY-RELATED SECURITIES. Under normal market conditions, the
Fund intends to invest primarily in equity securities of small and medium sized
U.S. companies, with the potential for above-average growth. These companies
will generally have a market capitalization ranging from $500 million to $4.5
billion. (If a portfolio security increases to greater than $4.5 billion in
market capitalization, however, the Fund will not necessarily sell the
security.) Equity securities include common stock, preferred stock, securities
convertible into or exchangeable for common or preferred stock, equity
investments in partnerships, joint ventures and other forms of non-corporate
investment, American Depositary Receipts, warrants and rights exercisable for
equity securities.
Securities of small and medium sized companies have historically been more
volatile than those in the S&P 500 Index. Accordingly, during periods when stock
prices decline generally, it can be expected that the value of the Fund will
decline more than the market indices. In addition, these companies are likely to
reinvest their earnings rather than distribute them; as a result, the Fund is
not likely to receive significant dividend income on its portfolio securities.
A convertible security is typically a bond, debenture, corporate note,
preferred stock or other similar security that may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock or other equity securities of the same or a different issuer. The
Fund will only invest in investment grade convertible securities. A warrant or
right entitles the holder to purchase equity securities at a specific price for
a specific period of time. Convertible securities are generally senior to common
stocks in a corporation's capital structure, but are usually subordinated to
similar non-convertible securities. While providing a fixed income stream
(generally higher in yield than the income derivable from a common stock but
lower than that afforded by a similar non-convertible security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation attendant upon a market
price advance in the convertible security's underlying common stock. Convertible
securities also include preferred stocks which technically are equity
securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (that is, its value as a fixed-income security)
or its "conversion value" (that is, its value upon conversion into its
underlying common stock). As a fixed-income security, a convertible security
tends to increase in market value when interest rates decline and tends to
decrease in value when interest rates rise. However, the price of a convertible
security is also influenced by the market value of the underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
In recent years, convertibles have been developed which combine higher or
lower current income with options and other features. The Fund may invest in
these types of convertible securities.
B-2
<PAGE>
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.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment. 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 interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed securities. The issuer of a series of CMOs may
elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All
future references to CMOs include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal 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
B-3
<PAGE>
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 (Commission), the Fund's investments in certain qualifying CMOs and
REMICs are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies.
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.
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.
B-4
<PAGE>
dollars will be greater than the equivalent amount in any such currency of such
expenses at the time they were incurred. The Fund may, but need not, enter into
forward foreign currency exchange contracts, options on foreign currencies and
futures contracts on foreign currencies and related options, for hedging
purposes, including: locking-in the U.S. dollar price of the purchase or sale of
securities denominated in a foreign currency; locking-in the U.S. dollar
equivalent of dividends to be paid on such securities which are held by the
Fund; and protecting the U.S. dollar value of such securities which are held by
the Fund.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN
SECURITIES. Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
issuer than about a domestic company. Foreign issuers generally are not subject
to uniform accounting, auditing and financial reporting standards comparable to
those applicable to domestic companies. There is generally less government
regulation of securities exchanges, brokers and listed companies abroad than in
the United States and there is a possibility of expropriation, confiscatory
taxation or diplomatic developments which could affect investment.
Additional costs could be incurred in connection with the Fund's
international investment activities. Foreign brokerage commissions are generally
higher than United States brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If a 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.
Shareholders should be aware that investing in the equity markets of
developing countries involves exposure to economies that are generally less
diverse and mature, and to political systems which can be expected to have less
stability than those of developed countries. Historical experience indicates
that the markets of developing countries have been more volatile than the
markets of developed countries. The risks associated with investments in foreign
securities, described above, may be greater with respect to investments in
developing countries.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Fund may invest in investment grade corporate and other debt obligations
of domestic and foreign issuers, including money market instruments. See "Money
Market Instruments" below. Bonds and other debt securities are used by issuers
to borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and must repay the amount borrowed at maturity. Investment
grade debt securities are rated within the four highest quality grades as
determined by Moody's Investors Service, Inc. (Moody's) (currently Aaa, Aa, A
and Baa for bonds), Standard & Poor's Ratings Group (S&P) (currently AAA, AA, A
and BBB for bonds), or another nationally recognized statistical rating
organization. Unrated securities may also be investment grade if, in the opinion
of the Subadviser, they are of equivalent quality to those rated in the four
highest quality grades. Securities rated Baa by Moody's or BBB by S&P, although
considered to be investment grade, lack outstanding investment characteristics
and, in fact, have speculative characteristics. Changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
interest and principal payments than is the case with higher grade bonds. Such
lower rated securities are subject to a greater risk of loss of principal and
interest. A portfolio security whose rating is downgraded below Baa by Moody's
or BBB by S&P, or otherwise has a reduction in credit quality below investment
grade, will be disposed of as soon as practicable.
MONEY MARKET INSTRUMENTS
The Fund may hold cash or invest in high quality money market instruments,
including commercial paper of a U.S. or non-U.S. company, foreign government
securities, certificates of deposit, bankers' acceptances and time deposits of
domestic and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar denominated or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase.
B-5
<PAGE>
HEDGING AND RETURN ENHANCEMENT STRATEGIES
The Fund may engage in various portfolio strategies, including using
derivatives to reduce certain risks of its investments and to attempt to enhance
return. The Fund, and thus investors may lose money through any unsuccessful use
of these strategies. These strategies currently include the use of options,
forward currency exchange contracts, futures contracts and options thereon. The
Fund's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that any
of these strategies will succeed. New financial products and risk management
techniques continue to be developed and the Fund may use these new investments
and techniques to the extent consistent with its investment objective and
policies.
OPTIONS TRANSACTIONS
The Fund may purchase and write (that is, sell) put and call options on
securities, stock indices and currencies that are traded on U.S. or foreign
securities exchanges or in the over-the-counter market to attempt to enhance
return or to hedge its portfolio. These options will be on equity securities,
stock indices (such as S&P 500) and foreign currencies. The Fund may write put
and call options to generate additional income through the receipt of premiums,
purchase put options in an effort to protect the value of securities (or
currencies) that it owns against a decline in market value and purchase call
options in an effort to protect against an increase in the price of securities
(or currencies) it intends to purchase. The Fund may also purchase put and call
options to offset previously written put and call options of the same series.
A call option gives the purchaser, in exchange for a premium paid, the right
for a specified period of time to purchase the securities or currency subject to
the option at a specified price (the exercise price or strike price). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, it gives up
the potential for gain on the underlying securities or currency in excess of the
exercise price of the option during the period that the option is open. There is
no limitation on the amount of call options the Fund may write.
A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities or currency subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
The Fund will write only "covered" options. A written option is covered if,
as long as the Fund is obligated under the option it (1) owns an offsetting
position in the underlying security or currency or (2) segregates cash or other
liquid assets in an amount equal to or greater than its obligation under the
option. Under the first circumstance, the Fund's losses are limited because it
owns the underlying security; under the second circumstance, in the case of a
written call option, the Fund's losses are potentially unlimited.
OPTIONS ON SECURITIES. [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 consideration (or for additional consideration
segregated 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 segregate the difference in
cash or other liquid assets with its Custodian. A put option written by the Fund
is
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"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
segregate cash or other liquid assets with its Custodian equivalent in value to
the exercise price of the option.
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 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," that is, 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
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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: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (6) 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 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. The
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
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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 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 securities 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, that is, 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.
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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 segregate cash or other
liquid assets (less the value of the "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 segregated will be marked-to-market
daily, and if the value of the segregated assets declines, additional cash or
other liquid assets will be placed in the account so that the value of the
assets 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
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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 AND OPTIONS THEREON
The Fund may purchase and sell financial futures contracts and options
thereon which are traded on a commodities exchange or board of trade to reduce
certain risks of its investments and to attempt to enhance return in accordance
with regulations of the Commodity Futures Trading Commission (CFTC). The Fund,
and thus investors, may lose money through any unsuccessful use of these
strategies. These futures contracts and related options will be on debt
securities, stock indices and foreign currencies. A futures contract is an
agreement to purchase or sell an agreed amount of securities or currencies at a
set price for delivery in the future. A stock index futures contract is an
agreement to purchase or sell cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the last
trading day of the contract and the price at which the agreement is made. No
physical delivery of the underlying stocks in the index is made. The Fund may
purchase and sell futures contracts or related options as a hedge against
changes in market conditions.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the market value
of the Fund's total assets. The Fund may purchase and sell futures contracts and
related options, without limitation, for BONA FIDE hedging purposes in
accordance with regulations of the CFTC (to reduce certain risks of its
investments). The value of all futures contracts sold will not exceed the total
market value of the Fund's portfolio.
Futures contracts and related options are generally subject to coverage
requirements of the CFTC or segregation requirements of the Commission. If the
Fund does not hold the security or currency underlying the futures contract, the
Fund will be required to segregate on an ongoing basis with its Custodian cash
or other liquid assets in an amount at least equal to the Fund's obligations
with respect to such futures contracts. The Fund may place and maintain cash,
securities and similar investments with a futures commission merchant in amounts
necessary to effect the Fund's transactions in exchange-traded futures contracts
and options thereon, provided certain conditions are satisfied. The Fund's
successful use of futures contracts and related options depends upon the
investment adviser's ability to predict the direction of the market and is
subject to various additional risks. The correlation between movements in the
price of a futures contract and the movements in the index or price of the
currencies underlying the futures contract is imperfect and there is a risk that
the value of the indices or currencies underlying the futures contract may
increase or decrease at a greater rate than the related futures contracts
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of futures contracts
or related options may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or related options on any particular day.
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.
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
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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
segregate with its Custodian, in the name of the broker performing the
transaction, an "initial margin" of cash or other liquid assets equal to
approximately 2-3% of the contract amount. Initial margin requirements are
established by the exchanges on which futures contracts trade and may, from time
to time, change. In addition, brokers may establish margin deposit requirements
in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to 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 segregated 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. Certain futures exchanges or boards of trade have
established daily limits on the amount that the price of futures contracts or
related options may vary, either up or down, from the previous day's settlement
price. These daily limits may restrict the Fund's ability to purchase or sell
certain futures contracts or related options on any particular day.
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. However, in the event a futures contract has been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, there is no guarantee that the price movements of the
securities will, in fact, correlate with the price movements in the futures
contracts and thus provide an offset to losses on a futures contract. 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.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus
investors, may lose money through any unsuccessful use of these strategies. If
the Subadviser's predictions of movements in the direction of the securities,
foreign currency or interest rate markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of options, foreign currency
and futures contracts and options on futures contracts include (1) dependence on
the Subadviser's ability to predict correctly movements in the direction of
interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies being
hedged; (3) the fact that skills needed to use these strategies are different
from those needed to select portfolio securities; (4) the possible absence of a
liquid secondary market for any particular instrument at any time; (5) the risk
that the counterparty may be unable to complete the transaction; and (6) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
the Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate liquid assets in connection
with hedging transactions.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if the investment adviser believes
that the other party to the options will continue to make a market for such
options.
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 other liquid assets 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 market 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 CFTC.
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 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 other liquid assets, or a portfolio of stocks substantially replicating
the movement of the index, in the judgment of the Fund's investment adviser,
with a market value at the time the option is written of not less than 100% of
the current index value times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate with its Custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities," all of which are stocks of issuers
in such industry or market segment, and that, in the judgment of the investment
adviser, substantially replicate the movement of the index with a market value
at the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts. Such stocks will
include stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Fund's holdings in
that industry or market segment. No individual security will represent more than
15% of the amount so segregated or pledged in the case of broadly-based stock
market index options or 25% of such
B-13
<PAGE>
amount in the case of industry or market segment index options. If at the close
of business on any day the market value of such qualified securities so
segregated or pledged falls below 100% of the current index value times the
multiplier times the number of contracts, the Fund will so segregate or pledge
an amount in cash or other liquid assets 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 other liquid assets equal in value to the
amount by which the call is in-the-money times the multiplier times the number
of contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to the Fund's obligation to segregate additional amounts in the event
that the market value of the qualified securities falls below 100% of the
current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security which is listed on a national
securities exchange or listed on NASDAQ against which the Fund has not written a
stock call option and which has not been hedged by the Fund by the sale of stock
index futures. However, if 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 other liquid
assets segregated with its Custodian, it will not be subject to the requirements
described in this paragraph.
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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into 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
segregate cash or other liquid assets having a value equal to or greater than
the Fund's purchase commitments. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during the period
between purchase and settlement. At the time of delivery of the securities the
value may be more or less than the purchase price and an increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Fund's
net asset value. If the 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.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will suffer a loss.
B-14
<PAGE>
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.
The Fund participates in a joint repurchase account with other investment
companies managed by PIFM pursuant to an order of the Commission. On a daily
basis, any uninvested cash balances of the Fund may be aggregated with those of
such investment companies and invested in one or more repurchase agreements.
Each fund participates in the income earned or accrued in the joint account
based on the percentage of its investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions or other
recognized institutional borrowers of securities, 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 100%, determined daily, of the market value 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 borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the net asset
value of the shares to rise faster than would otherwise be the case. On the
other hand, if the investment performance of the additional securities purchased
fails to cover their cost (including any interest paid on the money borrowed) to
the Fund, the net asset value of the Fund's shares will decrease faster than
would otherwise be the case. This is the speculative factor known as "leverage."
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. The Fund will not purchase portfolio
securities when borrowings exceed 5% of the value of its total assets.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act) and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. The Fund's investment in Rule
144A
B-15
<PAGE>
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. Repurchase agreements subject to demand are
deemed to have a maturity equal to the applicable notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). In addition, in order for commercial paper that is issued in reliance
on Section 4(2) of the Securities Act to be considered liquid, (a) 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 (b) it must not be "traded flat" (that is,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
The staff of the Commission has taken the position that purchased
over-the-counter options and the assets used as "cover" for written
over-the-counter options are illiquid securities unless the Fund and the
counterparty have provided for the Fund, at the Fund's election, to unwind the
over-the-counter option. The exercise of such an option ordinarily would involve
the payment by the Fund of an amount designed to reflect the counterparty's
economic loss from an early termination, but does allow the Fund to treat the
assets used as "cover" as "liquid."
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
non-affiliated investment companies. If the 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."
B-16
<PAGE>
SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will segregate cash or liquid assets with the Fund's
Custodian. "Liquid assets" mean cash, U.S. Government securities, equity
securities (including foreign securities), debt obligations or other liquid,
unencumbered assets marked-to-market daily.
(d) 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.
(e) 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 generally is not expected to exceed 200%. The portfolio turnover
rate for the fiscal periods ended October 31, 1998 and 1997 were % and 107%.
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 "Brokerage Allocation and Other Practices" and "Taxes, Dividends
and Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of 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 (1) 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 (2) more than 50% of the
outstanding voting shares.
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.
B-17
<PAGE>
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-18
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS (AGE)(1) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (73) Director President and Director of BMC Fund, Inc., a closed-end investment
company; formerly Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the
Board of Trustees of Mars Hill College and Director or Trustee
of funds within the Prudential Mutual Funds.
Delayne Dedrick Gold (59) Director Marketing and Management Consultant and Director or Trustee of
funds within the Prudential Mutual Funds.
*Robert F. Gunia (51) Vice President and Director Vice President (since September 1997) of Prudential, Executive
Vice President and Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM); Senior Vice President
(since March 1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief Administrative Officer
(July 1990 - September 1996), Director (January 1989 - September
1996), 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. and Director or Trustee of
funds within the Prudential Mutual Funds.
Douglas H. McCorkindale (58) Director President (since September 1997) and Vice Chairman (since March
1984) of Gannett Co. Inc. (publishing and media); Director of
Gannett Co. Inc., Frontier Corporation and Continental Airlines,
Inc. and Director or Trustee of funds within the
Prudential Mutual Funds.
*Mendel A. Melzer, CFA (38) Director Chief Investment Officer (since October 1996) of Prudential
751 Broad St. Investments Asset Management; formerly Chief Financial Officer
Newark, NJ 07102 (November 1995 - 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. and Director or Trustee of
funds within the Prudential Mutual Funds.
Thomas T. Mooney (56) 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, The Business Council of New York State, Monroe County
Water Authority, Rochester Jobs, Inc., Executive Service Corps
of Rochester, Monroe County Industrial Development Corporation,
Northeast-Midwest Institute; President, Director and Treasurer
of First Financial Fund, Inc. and The High Yield Plus Fund, Inc.
and Director or Trustee of funds within the Prudential
Mutual Funds.
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS (AGE)(1) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Stephen P. Munn (55) Director Chairman (since January 1994), Director and President (since
1988) and Chief Executive Officer (1988 - December 1993) of
Carlisle Companies Incorporated (manufacturer of industrial
products) and Director or Trustee of funds within the
Prudential Mutual Funds.
*Richard A. Redeker (54) 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 The Prudential Investment Corporation,
Director (January 1994 - September 1996) of Prudential Mutual
Fund Distributors, Inc. and Prudential Mutual Fund Services,
Inc. and Senior Executive Vice President and Director (September
1978 - September 1993) of Kemper Financial Services, Inc. and
Director or Trustee of funds within the Prudential
Mutual Funds.
Robin B. Smith (58) Director Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief
Executive Officer (January 1988 - August 1996) and President and
Chief Operating Officer (September 1981 - December 1988) of
Publishers Clearing House; Director of BellSouth Corporation,
Texaco Inc., Springs Industries Inc. and Kmart Corporation and
Director or Trustee of funds within the Prudential
Mutual Funds.
Louis A. Weil, III (57) Director Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and Chief
Executive Officer (August 1991 - December 1995) of Phoenix
Newspapers, Inc.; formerly, Publisher (May 1989 - March 1991) of
Time Magazine, President, Publisher & Chief Executive Officer
(February 1986 - August 1989) of The Detroit News and member of
the Advisory Board, Chase Manhattan Bank-Westchester; Director
of The High Yield Income Fund, Inc. and Director or Trustee of
funds within the Prudential Mutual Funds.
Clay T. Whitehead (59) Director President (since May 1983) of National Exchange Inc. (new
business development firm) and Director or Trustee of
funds within the Prudential Mutual Funds.
Grace C. Torres (39) Treasurer and Principal First Vice President (since December 1996) of PIFM; First Vice
Financial and Accounting President (since March 1993) of Prudential Securities; formerly
Officer First Vice President (March 1994 - September 1996) of Prudential
Mutual Fund Management, Inc. and Vice President (July 1989 -
March 1994) of Bankers Trust Corporation.
</TABLE>
B-20
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS (AGE)(1) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Marguerite E.H. Morrison (42) Assistant Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel of Prudential Securities; formerly
Vice President and Associate General Counsel (June 1991 -
September 1996) of Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments;
formerly First Vice President (February 1993 - September 1996)
of Prudential Mutual Fund Management, Inc.
</TABLE>
- ------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities or PIFM.
(1) Unless otherwise indicated, the address of the Directors and officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
The Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Fund's officers, who
conduct and supervise the daily business operations of the Fund.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.
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
the investment adviser annual compensation of $2,500, in addition to certain
out-of-pocket expenses. The amount of annual compensation paid to each Director
may change as a result of the introduction of additional funds on the boards of
which the Director 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 a Commission 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.
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, Mr. Beach is scheduled to retire on December 31, 1999.
The following table sets forth the estimated aggregate compensation
estimated to be paid by the Fund for the fiscal year ended October 31, 1998 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
investment companies managed by PIFM (Fund Complex) for the calendar year ended
December 31, 1997.
B-21
<PAGE>
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 $ 2,500 None N/A $ 135,000(38/63)*
Delayne Dedrick Gold $ 2,500 None N/A $ 135,000(38/63)*
Robert F. Gunia (+) -- None N/A None
Douglas H. McCorkindale** $ 2,500 None N/A $ 70,000(20/35)*
Mendel A. Melzer (+) -- None N/A None
Thomas T. Mooney** $ 2,500 None N/A $ 115,000(31/64)*
Stephen P. Munn $ 2,500 None N/A $ 45,000(15/21)*
Richard A. Redeker (+) -- None N/A None
Robin B. Smith** $ 2,500 None N/A $ 98,000(27/34)*
Louis A. Weil, III $ 2,500 None N/A $ 98,000(26/50)*
Clay T. Whitehead $ 2,500 None N/A $ 45,000(15/21)*
</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, 1997 includes amounts deferred at the election of Directors
under the funds' deferred compensation plans. Including accrued interest, total
compensation amounted to approximately $71,640, $143,909 and $139,707 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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or CDSC to a limited group
of investors.
As of October 9, 1998, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.
As of October 9, 1998, beneficial owners, directly or indirectly, of more
than 5% of any class of shares of the Fund were: Oakbrook Realty & Investment
LLC, 1000 Royce Blvd., Oakbrook Terrace IL 60181-4809 which owned approximately
54,517 Class Z shares (or approximately 27.7% of the outstanding Class Z
shares).
As of October 9, 1998, Prudential Securities was the record holder for other
beneficial owners of [2,231,771 Class A shares (approximately 83.7% of such
shares outstanding), 5,628,277 Class B shares (approximately 79.8% of such
shares outstanding), 490,650 Class C shares (approximately 85% of such shares
outstanding) and 193,283 Class Z shares (approximately 98.2%] 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.
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential Mutual Funds. See "How the
Fund Is Managed--Manager" in the Prospectus of the Fund. As of November 30,
1998, PIFM managed and/or administered open-end and closed-end management
investment companies with assets of approximately $60 billion. According to the
Investment Company Institute, as of October 31, 1998, the Prudential Mutual
Funds were the th largest family of mutual funds in the United States.
B-22
<PAGE>
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to 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 subadviser;
(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 the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI), 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 subadviser, (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
Commission, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, and paying the fees and expenses
of notice filings made in accordance with state securities laws, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Directors' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the 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'
B-23
<PAGE>
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.
For the fiscal year ended October 31, 1998 and the period ended October 31,
1997, PIFM received management fees of $ and $508,126, respectively, from
the Fund.
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 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.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities) was the Fund's distributor. PIMS
and Prudential Securities are subsidiaries of Prudential.
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), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
incurs the expenses of distributing the Class Z shares under the 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.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of brokers or financial institutions which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The
distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by dealers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares.
The Class A Plan provides that (1) .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 (2) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. The Distributor has
voluntarily limited its distribution-related fees payable under the Class A Plan
to .25 of 1% of the average daily net assets of the Class A shares. This
voluntary waiver may be terminated at any time without notice.
For the fiscal year ended October 31, 1998, the Distributor and Prudential
Securities received payments of approximately $ and $ , respectively,
under the Class A Plan and spent approximately $ and $ , respectively,
in
B-24
<PAGE>
distributing the Class A shares. This amount was primarily expended for payment
of account servicing fees to financial advisers and other persons who sell Class
A shares. For the fiscal year ended October 31, 1998, the Distributor and
Prudential Securities also received approximately $ and $ ,
respectively, in initial sales charges.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B and Class C
Plans provide that (1) .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 (2) .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 service fee (.25 of 1% of average daily net assets) is used to pay
for personal service and/or the maintenance of shareholder accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders.
CLASS B PLAN. For the fiscal year ended October 31, 1998, the Distributor
and Prudential Securities received approximately $ and $ , respectively,
from the Fund under the Class B Plan and spent approximately $ and
$ , respectively in distributing the Fund's Class B shares. It is
estimated that of the latter total amount, approximately % ($ ) was spent on
printing and mailing of prospectuses to other than current shareholders; %
($ ) was spent on compensation to broker-dealers for commissions to
representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred for
distribution of Fund shares; and % ($ ) on the aggregate of (i) payments
of commissions and account servicing fees to financial advisers ( % or $ )
and (ii) an allocation on account of overhead and other branch office
distribution-related expenses ( % or $ ). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating Prudential Securities' and Pruco Securities Corporation's (PruSec's)
branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) expenses of mutual fund
sales coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class B shares. For the fiscal year ended October 31, 1998, the
Distributor and Prudential Securities received approximately $ and $ ,
respectively, in contingent deferred sales charges attributable to Class B
shares.
CLASS C PLAN. For the fiscal year ended October 31, 1998, the Distributor
and Prudential Securities received $ and $ , respectively, under the
Class C Plan and spent approximately $ and $ , respectively, in
distributing Class C shares. It is estimated that of the latter total amount,
approximately % ($ ) was spent on printing and mailing of prospectuses to
other than current shareholders; % ($ ) on compensation to broker-dealers
for commissions to representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses incurred for
distribution of Fund shares; and % ($ ) on the aggregate of (1) payments
of commissions and account servicing fees to financial advisers ( % or $ )
and (2) an allocation on account of overhead and other branch office
distribution-related expenses ( % or $ ).
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. For the fiscal year ended October 31, 1998, the
Distributor and Prudential Securities received approximately $ and $ ,
respectively, in contingent deferred sales charges attributable to Class C
shares.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C shares of
the Fund other than expenses allocable to a particular class. The distribution
fee and sales charge of one class will not be used to subsidize the sale of
another class.
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 Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the Class A, Class B or Class C Plan or in any agreement
related to the Plans (Rule 12b-1 Directors), cast in person at a meeting called
for the purpose of voting on such continuance. A Plan may be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Directors or
by the vote of the holders of a majority of the outstanding shares of the
applicable class of the Fund on not more than 60 days', nor
B-25
<PAGE>
less than 30 days' written notice to any other party to the Plan. 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. The 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 the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons
which distributes shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
[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 each class of 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.]
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
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, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee per
shareholder account of $ , a new account set-up fee of $ for each manually
established account and a monthly inactive zero balance account fee of $ per
shareholder account. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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.
B-26
<PAGE>
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
Commission. Thus, it will not deal in the over-the-counter market 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.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
execution. The Manager seeks to effect each transaction at a price and
commission that provides the most favorable total cost or proceeds reasonably
attainable in the circumstances. The factors that the Manager may consider in
selecting a particular broker, dealer or futures commission merchant (firms) are
the Manager's knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the portfolio transaction; the
size of the transaction; the desired timing of the trade; the activity existing
and expected in the market for the particular transaction; confidentiality; the
execution, clearance and settlement capabilities of the firms; the availability
of research and research related services provided through such firms; the
Manager's knowledge of the financial stability of the firms; the Manager's
knowledge of actual or apparent operational problems of firms; and the amount of
capital, if any, that would be contributed by firms executing the transaction.
Given these factors, the Fund may pay transaction costs in excess of that which
another firm might have charged for effecting the same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer data bases, quotation equipment and services, research oriented
computer software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultants. Such services are used in
connection with some or all of the Manager's investment activities; some of such
services, obtained in connection with the execution of transactions for one
investment account, may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct sufficient
commissions to them to ensure the continued receipt of those services that the
Manager believes provides a benefit to the Fund and its other clients. The
Manager makes a good faith determination that the research and/or service is
reasonable in light of the type of service provided and the price and execution
of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to its clients. The allocation of orders among firms and the commission rates
paid are renewed periodically by the Fund's Directors. 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 Commission. This limitation, in the opinion of the
Fund, will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
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 the 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 firms in
connection with comparable transactions involving similar securities or futures
being purchased or sold on an exchange or board of trade during a comparable
period of
B-27
<PAGE>
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 firm 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, as amended, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for a Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to a Fund at least annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from
transactions effected for the Fund during the applicable period. Brokerage and
futures transactions with Prudential Securities are also subject to such
fiduciary standards as may be imposed by applicable law.
Transactions in options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options are written or held on the same or
different exchanges or are written or held in one or more accounts or through
one or more brokers. Thus, the number of options which the Fund may write or
hold may be affected by options written or held by the Manager and other
investment advisory clients of the Manager. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The table below sets forth information concerning the payment of commissions
by the Fund, including the amount of such commissions paid to Prudential
Securities for the fiscal periods ended October 31, 1998.
<TABLE>
<CAPTION>
FISCAL FISCAL
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Total brokerage commissions paid by the Fund.......................................... $ 377,018
Total brokerage commissions paid to Prudential Securities and its foreign
affiliates........................................................................... $ 4,500
Percentage of total brokerage commissions paid to Prudential Securities and its
foreign affiliates................................................................... 1.2%
</TABLE>
The Fund effected % of the total dollar amount of its transactions
involving the payment of commissions through Prudential Securities during the
period ended October 31, 1998. Of the total brokerage commissions paid during
that period, $ (or %) were paid to firms which provide research,
statistical or other services to PIFM. PIFM has not separately identified a
portion of such brokerage commissions as applicable to the provision of such
research, statistical or other services.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at October 31, 1998. As of October 31, 1998, the Fund held
securities of in the amount of $ .
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.001 par
value per share, divided into four classes, designated Class A, Class B, Class C
and Class Z common stock. Of the authorized shares of common stock of the Fund,
1 billion shares consist of Class A common stock, 500 million shares consist of
Class B common stock, 300 million shares consist of Class C common stock and 200
million shares consist of Class Z common stock. Each class of common stock of
the Fund represents an interest in the same assets of the Fund and is identical
in all respects except that (1) each class is subject to different sales charges
and distribution and/or service fees (except Class Z shares, which are not
subject to any sales charges and distribution and/or service fees), which may
affect performance, (2) 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, (3)
each class has a different exchange privilege, (4) only Class B shares have a
conversion feature and (5) Class Z shares are offered exclusively for sale to a
limited group of investors. In accordance with the Fund's Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series of common stock and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Board may
determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances. Each share of each class of common stock is
B-28
<PAGE>
equal as to earnings, assets and voting privileges, except as noted above, and
each class bears the expenses related to the distribution of its shares (with
the exception of Class Z shares, which are not subject to any distribution
and/or service fees). Except for the conversion feature applicable to the Class
B shares, there are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled to
its portion of all of the Fund's assets after all debts and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/ or service fees. The Fund's shares do not have cumulative
voting rights for the election of Directors.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% or more
of the Fund's outstanding shares for the purpose of voting on the removal of one
or more Directors or to transact any other business.
PURCHASE, REDEMPTION AND PRICING 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 (1) at the time of purchase (Class A or Class C
shares) or (2) 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.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company (State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Emerging Growth Fund, Inc., specifying on the
wire the account number assigned by PMFS and your name and identifying the class
in which you are eligible to invest (Class A, Class B, Class C or Class Z
shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Emerging Growth
Fund, Inc., Class A, Class B, Class C or Class Z shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) is approved by the Fund's investment adviser.
B-29
<PAGE>
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%, Class C*
shares are sold with a 1% sales charge and Class B* and Class Z shares are sold
at net asset value. Using the net asset value of the Fund at October 31, 1998,
the maximum offering price of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per
Class A share............................... $
Maximum sales charge (5% of offering
price)......................................
------
Maximum offering price to public............. $
------
------
CLASS B
Net asset value, redemption price and
offering price to public per Class B
share*...................................... $
------
------
CLASS C
Net asset value and redemption price per
Class C share*.............................. $
Sales charge (1% of offering price)..........
------
Offering price to public.....................
------
------
CLASS Z
Net asset value, offering price and
redemption price to public per Class Z
share....................................... $
------
------
</TABLE>
-------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
[If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution
related fee on Class A shares would be less than those of the Class B and Class
C shares.]
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual
distribution-related fees on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class B or
Class C distribution-related fee on the investment, fluctuations in NAV, the
effect of the return on the investment over this period of time or redemptions
when the CDSC is applicable.
B-30
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLAN. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Section 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential Securities or its subsidiaries (Prudential
Securities or Subsidiary Prototype Benefit Plans), Class A shares may be
purchased at NAV by participants who are repaying loans made from such plans to
the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchase at NAV by
certain savings, retirement and deferred compensation plans, qualified or
nonqualified under the Internal Revenue Code, for which Prudential serves as the
plan administrator or recordkeeper, provided that (1) the plan has at least $1
million in existing assets or 250 eligible employees and (2) 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 and
403(b)(7) or the Internal Revenue Code and plans that participate in the
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray 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" includes stock issued by a plan sponsor,
shares of Prudential Mutual Funds and shares of certain unaffiliated mutual
funds that participate in the PruArray Plan (Participating Funds). "Existing
assets" also include monies invested in The Guaranteed Interest Account (GIA), a
group annuity insurance product issued by Prudential, the Guaranteed Insulated
Separate Account, a separate account operated by Prudential, and units of The
Stable Value Fund (SVF), and unaffiliated bank collective fund. Class A shares
may also be purchased at NAV by plans that have monies invested in GIA and SVF,
provided (1) the purchase is made with the proceeds of a redemption from either
GIA or SVF and (2) Class A shares are an investment option of the plan.
PRUAARRY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at NAV
to Benefit Plans or nonqualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in the PruArray Plan provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or nonqualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified Plan(s) or nonqualified
plans so long as the employers in the Association (1) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (2) maintain their accounts with the Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under the
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 (1) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (2) spouses
of employees who open an IRA account with the Transfer Agent. The program is
offered to companies that have at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchase will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
- officers of the Prudential Mutual Funds (including the Fund)
- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent
- employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer
- 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
B-31
<PAGE>
- registered representatives and employees of Dealers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) 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, (2) 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 or 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase
and
- investors in Individual Retirement Accounts, provided the purchase is made
with the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential Investments serves as the recordkeeper or administrator.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
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 "How to Buy, Sell and Exchange Shares of the
Fund--Reducing or Waiving Class A's Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual;
- the individual's spouse, their children and their parents;
- the individual's and spouse's Individual Retirement Account (IRA);
- 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);
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
- 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 Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of a
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. The value of shares held directly with the Transfer Agent
and through your broker will not be aggregated to determine the reduced sales
charge. The value of existing holdings for purposes of determining the reduced
sales charge is calculated using the maximum offering price (net asset value
plus maximum sales charge) as of the previous business day. 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.
B-32
<PAGE>
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 the 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 the 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,
Prudential or its affiliates and through your broker will not be aggregated to
determine the reduced sales charge.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant 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 charge 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.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of Shares--
Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons which sell Class B shares at the time of sale. This facilitates
the ability of the Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates that
it will recoup its advancement of sales commissions from the combination of the
CDSC and the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
B-33
<PAGE>
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
- pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which the Fund is an available option
(collectively, Benefit Plans), provided such Benefit Plans (in combination
with other plans sponsored by the same employer or group of related
employers) have at least $50 million in defined contribution assets;
- participants in any fee-based program sponsored by an affiliate of the
Distributor which includes mutual funds as investment options and for
which the Fund is an available option;
- certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by an affiliate of the Distributor for whom Class Z
shares of the Prudential Mutual Funds are an available option;
- Benefit Plans for which an affiliate of the Distributor serves as
recordkeeper and as of September 20, 1996, (a) were Class Z shareholders
of the Prudential Mutual Funds or (b) executed a letter of intent to
purchase Class Z shares of the Prudential Mutual Funds;
- current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund);
- employees of Prudential or Prudential Securities who participate in an
employer-sponsored employee savings plan; and
- Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finders' fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charges"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (that is,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be submitted before such request
will be accepted. All correspondence and documents concerning redemptions should
be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services, LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010, the Distributor or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, the signature(s)
on the redemption request and on the certificates, if any, or stock power must
be guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or
B-34
<PAGE>
office manager of most Prudential Insurance and Financial Services or Preferred
Services offices. In the case of redemptions from a PruArray Plan, if the
proceeds of the redemption are invested in another investment option of the plan
in the name of the record holder and at the same address as reflected in the
Transfer Agent's records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (4) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, which may take up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or cashier's check.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a PRO RATA basis.) You must notify the Transfer Agent,
either directly or through the Distributor or your broker, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the amount
reinvested, may not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase will be subject to a 1% CDSC. The CDSC
will be deducted from the redemption proceeds and reduce the amount paid to you.
The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and 18 months, in the case of Class C shares (one year
for Class C shares purchased before November 2, 1998). A CDSC will be applied on
the lesser of the original purchase price or the current value of the shares
being redeemed. Increases in the value of your shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any
B-35
<PAGE>
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "Shareholder
Investment Account--Exchange Privilege."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE AS A
YEAR SINCE PURCHASE PERCENTAGE OF DOLLARS INVESTED OR REDEMPTION
PAYMENT MADE PROCEEDS
-------------------- --------------------------------------------
<S> <C>
First............... 5.0%
Second.............. 4.0%
Third............... 3.0%
Fourth.............. 2.0%
Fifth............... 1.0%
Sixth............... 1.0%
Seventh............. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years; then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution based on
life expectancy;
(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and
(4) a tax-free return of an excess contribution or plan distributions following
the death or disability of the shareholder, provided that the shares were
purchased prior to death or disability.
The waiver does not apply in the case of a tax-free rollover or transfer of
assets, other than one following a separation from service (that is, following
voluntary or involuntary termination of employment or following retirement).
Under no circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions otherwise
qualify for a waiver as described above. In the case of Direct Account and
Prudential Securities or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will
B-36
<PAGE>
thereafter be subject to a CDSC without regard to the time such amounts were
previously invested. In the case of a 401(k) plan, the CDSC will also be waived
upon the redemption of shares purchased with amounts used to repay loans made
from the account to the participant and from which a CDSC was previously
deducted.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Transfer Agent either directly or through your broker,
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
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.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans for which
Prudential provides administrative or recordkeeping services that participate in
the PruArray Plan.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (1)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion
B-37
<PAGE>
date to (b) the total amount paid for all Class B shares purchased and then held
in your account (2) multiplied by the total number of Class B shares purchased
and then held in your account. Each time any Eligible Shares in your account
convert to Class A shares, all shares or amounts representing Class B shares
then in your account that were acquired through the automatic reinvestment of
dividends and other distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares were
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
B-38
<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/OR 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.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in noncertificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
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.
B-39
<PAGE>
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 of the Fund 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.
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 the 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.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise. Similarly,
shareholders who qualify to purchase Class Z shares will have their Class B and
Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or
B-40
<PAGE>
Class C shares and (3) amounts representing Class B or Class C shares held
beyond the applicable CDSC period. Class B and Class C shareholders must notify
the Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged or Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent, the
Distributor or your broker. 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 Investment Plan."
</TABLE>
- ------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of a Fund. The investment
return and principal value of an investment will fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost.
AUTOMATIC INVESTMENT PLAN (AIP). Under AIP, an investor may arrange to have
a fixed amount automatically invested in shares of a Fund monthly by authorizing
his or her bank account or brokerage account (including a Prudential Securities
Command Account) to be debited to invest specified dollar amounts in shares of
the Fund. The investor's bank must be a member of the Automatic Clearing House
System. Stock certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through the Transfer Agent, the Distributor or your broker. 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.
B-41
<PAGE>
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) 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.
The Transfer Agent, the Distributor or your broker acts as an agent 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 (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.
TAX-DEFERRED RETIREMENT PLANS. Various qualified retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code are available
through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction of
accounts by participants, or a pooled account arrangement. Information regarding
the establishment of these plans, and the administration, custodial fees 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
<FN>
- ------------
(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.
Distributions from a Roth IRA which meet the conditions required under the
Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
</TABLE>
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.
B-42
<PAGE>
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Board of Directors has fixed the specific time of day for the computation of the
Fund's net asset value to be as of 4:15 P.M., New York time. 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 the 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 the Fund's shares shall be determined at a time between such
closing and 4:15 P.M., New York time. The New York Stock Exchange is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
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 of such exchange system on the day of valuation, or, if there
was no sale on such day, the mean between the last bid and asked prices on such
day, or at the bid price on such day in the absence of an asked price. Corporate
bonds (other than convertible debt securities) and U.S. Government securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the basis
of valuations provided by an independent pricing agent or principal market maker
which uses information with respect to transactions in bonds, quotations from
bond dealers, agency ratings, market transactions in comparable securities and
various relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers or independent pricing agents. Options on stock and stock indices traded
on an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sale prices as of the close of the trading on
the applicable commodities exchange or board of trade or, if there was no sale
on the applicable commodities exchange or board of trade on such day, at the
mean between the most recently quoted bid and asked prices on such exchange or
board of trade. Quotations of foreign securites in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained from a
recognized bank or dealer and forward currency exchange contracts are valued at
the current cost of covering or offsetting such contracts. 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 reliable market quotations are not
readily available, or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgement of the Manager or Subadviser (or Valuation Committee or
Board of Directors), does not represent fair value are valued by the Valuation
Committee or Board in consultation with the Manager and Subadviser, including
its portfolio manager, traders, and its research and credit analysts, on the
basis of the following factors: cost of the security, transactions in comparable
securities, relationships among various securities and such other factors as may
be determined by the Manager, Subadviser, Board of Directors or Valuation
Committee to materially affect the value of the security. Short-term debt
securities are valued at cost, with interest accrued or discount amortized to
the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Board of Directors not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A
B-43
<PAGE>
shares as a result of the larger distribution-related fee to which Class B and
Class C shares are subject. The NAV of Class Z shares will generally be higher
than the NAV of Class A, Class B or Class C shares as a result of the fact that
Class Z shares are not subject to any distribution and/or service fee. It is
expected, however, that the net asset value per share of the four classes 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 and capital gains which is 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 diversify its holdings
so that, at the end of each quarter of the taxable year (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the value of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities); and (c) the Fund distribute to its shareholders at least
90% of its net investment income and net short-term 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 generally be treated
as long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put or
writes a call thereon or 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, constructive sale,
conversion transaction and straddle provisions of the Internal Revenue Code
which may, among other things require the Fund to defer recognition of losses.
In addition, debt securities acquired by the Fund may be subject to original
issue discount and market discount rules which, respectively, may cause the Fund
to accrue income in advance of the receipt of cash with respect to interest or
cause gains to be treated as ordinary income.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which 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.
Forward currency contracts, options and futures contracts entered into by
the Fund may create "straddles" for federal income tax purposes. Positions which
are part of a straddle will be subject to certain wash sale, short sale and
constructive sale provisions of the Internal Revenue Code. In the case of a
straddle, the Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund.
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
B-44
<PAGE>
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.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares and lower
on Class A shares in relation to Class Z shares. The per share distributions of
net capital gains, if any, will be paid in the same amount for Class A, Class B,
Class C and Class Z shares. See "Net Asset Value."
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
B-45
<PAGE>
dividends paid to a foreign shareholder are generally not subject to withholding
tax. A foreign shareholder will, however, be required to pay U.S. income tax on
any dividends and capital gain distributions which are effectively connected
with a U.S. trade or business of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent 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.
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 of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total returns for the Class A shares for the one year and
since inception (December 31, 1996) periods ended October 31, 1998 of the Fund
were % and %, respectively. The average annual total returns for Class B
shares for the one year and since inception (December 31, 1996) periods ended
October 31, 1998 were and , respectively. The average annual total returns for
Class C shares for the one year and since inception (December 31, 1996) periods
ended October 31, 1998 were and , respectively. The average annual total
returns for the Class Z shares for the one year and since inception (December
31, 1996) periods ended October 31, 1998 were and , 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.
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 one year
and since inception
B-46
<PAGE>
(December 31, 1996) periods ended October 31, 1998 for the Class A shares of the
Fund were % and %, respectively. The aggregate total returns for Class B
shares for the one year, and since inception (December 31, 1996) periods ended
October 31, 1998 were % and %, respectively. The aggregate total returns for
Class C shares for the one year and since inception periods ended October 31,
1998 were % and %, respectively. The aggregate total returns for the Class Z
shares for the one year and since inception periods ended October 31, 1998 were
% and %, respectively.
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of the period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[( ------- +1)(to the power of 6) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund also may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include data
from Lipper Analytical Services, Inc., Morningstar Publications, Inc., other
industry publications, business periodicals and market 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>
A LOOK AT PERFORMANCE
OVER THE LONG-TERM
AVERAGE ANNUAL
RETURNS
1/1/26 - 12/31/97)]
LONG-TERM
COMMON STOCKS GOVT. BONDS INFLATION
<S> <C> <C>
11.0% 5.2% 3.1%
</TABLE>
- ------------
(1)Source: Ibbotson Associates STOCKS, BONDS, BILLS AND INFLATION--1998
YEARBOOK (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). All rights reserved. Common stock returns are based on the
Standard & Poor's 500 Stock Index, a market-weighted, unmanaged index of 500
common stocks in a variety of industry sectors. It is a commonly used indicator
of broad stock price movements. This chart is for illustrative purposes only and
is not intended to represent the performance of any particular investment or
fund. Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-47
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 1997
PRUDENTIAL EMERGING GROWTH FUND, INC.
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
LONG-TERM INVESTMENTS--97.4%
COMMON STOCKS--97.4%
- -----------------------------------------------------------------
APPAREL & TEXTILES--3.5%
40,000 Kellwood Co. $ 1,382,500
25,000 Liz Claiborne, Inc. 1,267,188
40,000 Westpoint Stevens, Inc. (a) 1,640,000
------------
4,289,688
- -----------------------------------------------------------------
APPLIANCES--1.5%
40,000 Sunbeam Corp. 1,812,500
- -----------------------------------------------------------------
BROADCASTING--6.0%
50,000 HSN, Inc. (a) 2,000,000
40,000 Sinclair Broadcast Group, Inc. (a) 1,460,000
40,000 Univision Communications, Inc. (a) 2,480,000
44,900 Westwood One, Inc. (a) 1,377,869
------------
7,317,869
- -----------------------------------------------------------------
CABLE & PAY TELEVISION SYSTEMS--2.3%
50,000 Liberty Media Group, Inc. (a) 1,740,625
40,000 United Video Satellite Group,
Inc.(a) 1,085,000
------------
2,825,625
- -----------------------------------------------------------------
CHEMICALS--1.1%
35,000 OM Group, Inc. 1,321,250
- -----------------------------------------------------------------
COMMERCIAL SERVICES--4.8%
30,000 Concord EFS, Inc. (a) 890,625
40,000 Corrections Corp. of America (a) 1,220,000
45,000 Gartner Group, Inc. (a) 1,271,250
40,000 Lason Holdings, Inc. (a) 1,032,500
17,500 MoneyGram Payment Systems, Inc. (a) 250,469
4,400 Outsource International Inc. 66,550
30,000 Paychex, Inc. 1,143,750
------------
5,875,144
- -----------------------------------------------------------------
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--10.4%
15,000 Cadence Design Systems, Inc. (a) $ 798,750
76,900 Checkfree Corp. (a) 2,076,300
49,300 DST Systems, Inc. (a) 1,740,906
36,300 GTECH Holdings Corp. (a) 1,170,675
60,000 Mentor Graphics Corp. (a) 656,250
30,500 Netscape Communications Corp. (a) 1,002,688
50,000 Sterling Commerce, Inc. (a) 1,659,375
37,500 Stratus Computer, Inc. (a) 1,326,562
57,200 Unisys Corp. (a) 761,475
76,400 USCS International, Inc. (a) 1,480,250
------------
12,673,231
- -----------------------------------------------------------------
ELECTRONICS--16.0%
39,666 Analog Devices, Inc. (a) 1,212,292
32,900 Applied Materials, Inc. (a) 1,098,038
45,000 Burr-Brown Corp. (a) 1,361,250
45,000 Dallas Semiconductor Corp. 2,199,375
30,000 Hadco Corp. (a) 1,661,250
58,500 International Rectifier Corp. (a) 800,719
50,000 Kent Electronics Corp. (a) 1,746,875
22,000 KLA Instruments Corp. (a) 966,625
100 Kulicke & Soffa Industries, Inc.(a) 2,575
10,000 Lattice Semiconductor Corp. (a) 500,625
10,000 Linear Technology Corp. (a) 628,750
57,800 Solectron Corp. (a) 2,268,650
27,500 Teradyne, Inc. (a) 1,029,531
52,500 The DII Group, Inc. (a) 1,292,812
35,000 Thermo Instrument System, Inc. (a) 1,262,187
25,000 Thermo Optek Corp. 423,438
60,000 ThermoQuest Corp. (a) 1,072,500
------------
19,527,492
- -----------------------------------------------------------------
ENTERTAINMENT--2.8%
5,500 N2K Inc. (a) 144,719
34,000 Regal Cinemas, Inc. (a) 782,000
54,400 Royal Caribbean Cruises Ltd. 2,526,200
------------
3,452,919
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 1997
PRUDENTIAL EMERGING GROWTH FUND, INC.
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
ENVIRONMENTAL SERVICES--1.6%
54,200 Allied Waste Industries, Inc. $ 1,104,325
21,500 USA Waste Services, Inc. 795,500
------------
1,899,825
- -----------------------------------------------------------------
FINANCIAL SERVICES--7.1%
7,500 Franklin Resources, Inc. 674,063
13,367 Legg Mason, Inc. 655,802
20,000 Norrell Corp. 582,500
15,000 Peoples Heritage Financial Group, Inc. 590,625
50,000 Select Appointments Holdings
(U.K.)(ADR) 917,187
15,000 Sirrom Capital Corp. 755,625
60,000 Sovereign Bancorp, Inc. 1,065,000
25,300 T. Rowe Price Associates, Inc. 1,676,125
25,200 Washington Mutual, Inc. 1,724,625
------------
8,641,552
- -----------------------------------------------------------------
FOODS--0.9%
60,000 Flowers Industries, Inc. 1,140,000
- -----------------------------------------------------------------
HEALTH SERVICES--0.6%
24,800 Omnicare, Inc. 689,750
- -----------------------------------------------------------------
HMO's--1.6%
60,000 Concentra Managed Care, Inc. (a) 1,957,500
- -----------------------------------------------------------------
INSURANCE--0.7%
20,000 NAC Re Corp. 890,000
- -----------------------------------------------------------------
LODGING--1.7%
40,000 Capstar Hotel Company 1,417,500
20,000 Four Seasons Hotels, Inc. 661,250
------------
2,078,750
- -----------------------------------------------------------------
MEDICAL SERVICES--3.6%
50,700 Covance, Inc. (a) 896,756
741 Genzyme Corp. (a) 6,391
40,000 Pediatric Services of America,
Inc.(a) 860,000
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
60,000 Renal Treatment Centers, Inc. (a) $ 1,991,250
25,000 Vencor, Inc. (a) 675,000
------------
4,429,397
- -----------------------------------------------------------------
MEDICAL TECHNOLOGY--6.8%
65,000 Acuson Corp. (a) 1,218,750
10,000 Incyte Pharmaceuticals, Inc. (a) 805,000
20,000 Luxottica Group S.p.A. (Italy)(ADR) 1,277,500
60,000 Mentor Corp. 2,186,250
50,000 Sola International, Inc. (a) 1,706,250
50,000 ThermoTrex Corp. (a) 1,150,000
------------
8,343,750
- -----------------------------------------------------------------
NURSING HOMES--2.5%
32,700 Atria Communities, Inc. (a) 543,638
75,000 Beverly Enterprises, Inc. (a) 1,120,312
40,000 Manor Care, Inc. 1,372,500
------------
3,036,450
- -----------------------------------------------------------------
OIL & GAS SERVICES--2.4%
40,000 Coflexip SA (France) (ADR) 2,200,000
20,000 Falcon Drilling Co., Inc. (a) 727,500
------------
2,927,500
- -----------------------------------------------------------------
PHARMACEUTICALS--6.3%
32,900 Biochem Pharma Inc. (Canada) (a) 824,556
40,000 Elan Corp. PLC (Ireland)(ADR) (a) 1,995,000
60,000 North American Vaccine, Inc.
(Canada) (a) 1,507,500
80,000 Pharmaceutical Product Development,
Inc. (a) 1,420,000
60,000 Watson Pharmaceuticals, Inc. (a) 1,905,000
------------
7,652,056
- -----------------------------------------------------------------
PUBLISHING--0.3%
15,000 Desktop Data, Inc. (a) 155,156
12,200 The Petersen Companies Inc. 240,950
------------
396,106
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 1997
PRUDENTIAL EMERGING GROWTH FUND, INC.
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
RETAIL--7.3%
50,000 BJ's Wholesale Club, Inc. (a) $ 1,443,750
22,300 Brylane, Inc. (a) 968,656
60,000 Consolidated Stores Corp. (a) 2,392,500
55,300 Linens 'N Things, Inc. (a) 1,987,344
50,000 Petco Animal Supplies, Inc. (a) 1,537,500
50,000 Stride Rite Corp. 587,500
------------
8,917,250
- -----------------------------------------------------------------
SCHOOLS--1.2%
30,000 Apollo Group, Inc. (a) 1,267,500
5,600 Education Management Corp. (a) 145,600
------------
1,413,100
- -----------------------------------------------------------------
TELECOMMUNICATIONS--2.3%
35,500 Teleport Communications Group,
Inc. (a) 1,717,312
69,300 Transaction Network Services,
Inc. (a) 1,152,113
------------
2,869,425
- -----------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT--1.2%
41,200 Metromedia Fiber Network Inc. 988,800
25,000 Scientific-Atlanta, Inc. 464,063
------------
1,452,863
- -----------------------------------------------------------------
TRANSPORTATION-ROAD & RAIL--0.9%
37,500 Kansas City Southern Industries,
Inc. 1,143,750
------------
Total long-term investments
(cost $102,678,514) 118,974,742
------------
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
SHORT-TERM INVESTMENTS--2.5%
REPURCHASE AGREEMENT
$3,093 Joint Repurchase Agreement Account,
5.70%, 11/3/97
(cost $3,093,000; Note 5) $ 3,093,000
------------
- -----------------------------------------------------------------
TOTAL INVESTMENTS--99.9%
(cost $105,771,514; Note 4) 122,067,742
Other assets in excess of
liabilities--0.1% 163,147
------------
Net Assets--100% $122,230,889
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL EMERGING GROWTH FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS OCTOBER 31, 1997
----------------
<S> <C>
Investments, at value (cost $105,771,514).. $122,067,742
Cash....................................... 160,251
Receivable for investments sold............ 1,389,326
Receivable for Fund shares sold............ 761,874
Deferred expenses and other assets......... 102,614
Dividends and interest receivable.......... 31,274
Prepaid registration fees.................. 27,503
------------
Total assets............................ 124,540,584
------------
LIABILITIES
Payable for investments purchased.......... 1,747,525
Payable for Fund shares reacquired......... 303,716
Accrued expenses........................... 106,309
Distribution fee payable................... 86,614
Management fee payable..................... 65,531
------------
Total liabilities....................... 2,309,695
------------
NET ASSETS................................. $122,230,889
------------
------------
Net assets were comprised of:
Common stock, at par.................... $10,300
Paid-in capital in excess of par........ 104,398,912
------------
104,409,212
Accumulated net realized gain on
investments............................ 1,525,449
Net unrealized appreciation on
investments............................ 16,296,228
------------
Net assets, October 31, 1997............... $122,230,889
------------
------------
Class A:
Net asset value and redemption price
per share ($33,123,942 DIVIDED BY
2,778,557 shares of common stock issued
and outstanding)....................... $11.92
Maximum sales charge (5% of offering
price)................................. .63
------
Maximum offering price to public........ $12.55
------
------
Class B:
Net asset value, offering price and
redemption price per share
($82,069,745 DIVIDED BY 6,927,670
shares of common stock issued and
outstanding)........................... $11.85
------
------
Class C:
Net asset value, offering price and
redemption price per share
($6,476,643 DIVIDED BY 546,701 shares
of common stock issued and
outstanding)........................... $11.85
------
------
Class Z:
Net asset value, offering price and
redemption price per share
($560,559 DIVIDED BY 46,986 shares of
common stock issued and outstanding).. $11.93
------
------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996(a)
THROUGH
NET INVESTMENT LOSS OCTOBER 31, 1997
--------------------
<S> <C>
Income
Dividends (net of foreign
withholding taxes of $2,717)..... $247,060
Interest.......................... 203,351
-----------
Total income.................. 450,411
-----------
Expenses
Management fee.................... 508,126
Distribution fee--Class A......... 58,788
Distribution fee--Class B......... 563,370
Distribution fee--Class C......... 46,173
Registration fees................. 167,497
Transfer agent's fees and
expenses......................... 121,000
Custodian's fees and expenses..... 78,000
Reports to shareholders........... 66,000
Amortization of deferred
organizational costs............. 20,285
Audit fee......................... 20,000
Legal fees........................ 20,000
Directors' fees................... 18,750
Miscellaneous..................... 8,665
-----------
Total expenses................ 1,696,654
-----------
Net investment loss............... (1,246,243)
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investment
transactions........................ 2,613,615
Net unrealized appreciation on
investments......................... 16,296,228
-----------
Net gain on investments.............. 18,909,843
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............ $17,663,600
-----------
-----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996(a)
INCREASE (DECREASE) THROUGH
IN NET ASSETS OCTOBER 31, 1997
--------------------
<S> <C>
Operations
Net investment loss...................... $(1,246,243)
Net realized gain on investments......... 2,613,615
Net unrealized appreciation on
investments............................. 16,296,228
-------------
Net increase in net assets resulting
from operations......................... 17,663,600
-------------
Fund share transactions (net of share
conversions) (Note 6)
Net proceeds from shares sold............ 133,828,498
Cost of shares reacquired................ (29,361,209)
-------------
Net increase in net assets from Fund
share transactions..................... 104,467,289
-------------
Total increase............................ 122,130,889
NET ASSETS
Beginning of period....................... 100,000
-------------
End of period............................. $122,230,889
-------------
-------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EMERGING GROWTH FUND, INC.
- -------------------------------------------------------------------------------
Prudential Emerging Growth Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund was incorporated in Maryland on August 23, 1996. The Fund
issued 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 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: Securities listed on a securities exchange (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, at the mean between the
closing bid and asked prices on such day, or at the bid price in the absence of
an asked price as provided by a pricing service. Securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued by an independent
pricing service. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by a principal market maker
or independent pricing agent. Options on securities and indices traded on an
exchange are valued at the mean between the most recently quoted bid and asked
prices provided by the respective exchange. Futures contracts and options
thereon are valued at the last sales price as of the close of business of the
exchange. Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
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 securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
Net investment income (loss), other than distribution fees, and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of the
day.
DIVIDENDS AND DISTRIBUTIONS: 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.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with the A.I.C.P.A.'s Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain and Return of Capital Distributions by Investment
Companies. The effect of applying this statement was to decrease undistributed
net investment income by $1,246,243, decrease accumulated realized gains by
$1,088,166, and decrease paid-in capital by $158,077. Net investment income, net
realized gains and net assets were not affected by this change.
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
- --------------------------------------------------------------------------------
B-53
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EMERGING GROWTH FUND, INC.
- -------------------------------------------------------------------------------
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 cost of the subadviser's services, the compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .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 are accrued daily and payable monthly.
No distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were charged at an annual rate of .25 of 1%, 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively, for the period December 31, 1996 through October 31, 1997.
PSI has advised the Fund that it has received approximately $197,300 in
front-end sales charges resulting from sales of Class A shares for the period
December 31, 1996 through October 31, 1997. From these fees, PSI paid such sales
charges to dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
PSI has advised the Fund that for the period December 31, 1996 through October
31, 1997, it received approximately $147,900 and $4,300 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 October 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
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 PIFM,
serves as the Fund's transfer agent. During the period ended December 31, 1996
through October 31, 1997, the Fund incurred fees of approximately $102,000 for
the services of PMFS. As of October 31, 1997, approximately $12,000 of such fees
were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations also include certain out-of-pocket expenses paid to non-affiliates.
During the period ended December 31, 1996 through October 31, 1997, PSI received
approximately $4,500 in brokerage commissions from portfolio transactions
executed on behalf of the Fund.
- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the period ended December 31, 1996 through October 31, 1997 were
$208,902,343 and $108,837,098, respectively.
The cost basis of investments for federal income tax purposes is $106,462,186.
As of October 31, 1997, net unrealized appreciation of investments for federal
income tax purposes was $15,605,556 (gross unrealized appreciation--$19,212,446;
gross unrealized depreciation--$3,606,890).
- ------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of October 31, 1997, the Fund
had a 0.4% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represented $3,093,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor were as follows:
- --------------------------------------------------------------------------------
B-54
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EMERGING GROWTH FUND, INC.
- -------------------------------------------------------------------------------
Bear Stearns, 5.70%, in the principal amount of $236,000,000, repurchase price
$236,112,100, due 11/3/97. The value of the collateral including accrued
interest is $241,912,917.
Credit Suisse First Boston Corp., 5.72%, in the principal amount of
$237,440,000, repurchase price $237,553,180, due 11/3/97. The value of the
collateral including accrued interest is $246,134,363.
Deutsche Morgan Grenfell, 5.70%, in the principal amount of $236,000,000,
repurchase price $236,112,100, due 11/3/97. The value of the collateral
including accrued interest is $240,720,618.
SBC Warburg, 5.66%, in the principal amount of $92,714,000, repurchase price
$92,757,730, due 11/3/97. The value of the collateral including accrued interest
is $94,588,984.
- ------------------------------------------------------------
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. Special exchange privileges are also available for shareholders who
qualify to purchase Class A shares at net asset value. Class Z shares are not
subject to any sales or redemption charge and are offered exclusively for sale
to a limited group of investors.
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 through
October 31, 1997 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 4,426,371 $ 46,029,734
Shares reacquired.................... (1,709,715) (18,558,290)
----------- ------------
Net increase in shares outstanding
before conversion.................. 2,716,656 27,471,444
Shares issued upon conversion from
Class B............................ 59,401 693,915
----------- ------------
Net increase in shares outstanding.. 2,776,057 $ 28,165,359
----------- ------------
----------- ------------
<CAPTION>
CLASS B SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 7,897,636 $ 80,935,138
Shares reacquired.................... (912,794) (9,938,884)
----------- ------------
Net increase in shares outstanding
before conversion.................. 6,984,842 70,996,254
Shares reacquired upon conversion
into Class A....................... (59,672) (693,915)
----------- ------------
Net increase in shares outstanding... 6,925,170 $ 70,302,339
----------- ------------
----------- ------------
<CAPTION>
CLASS C SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 603,231 $ 6,123,875
Shares reacquired.................... (59,030) (606,543)
----------- ------------
Net increase in shares outstanding... 544,201 $ 5,517,332
----------- ------------
----------- ------------
<CAPTION>
CLASS Z SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 68,252 $ 739,751
Shares reacquired.................... (23,766) (257,492)
----------- ------------
Net increase in shares outstanding... 44,486 $ 482,259
----------- ------------
----------- ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- ------------------------------------------------------------
NOTE 7. DISTRIBUTIONS
On December 10, 1997 the Board of Directors of the Fund declared a short-term
capital gain distribution of $0.214 per share for Class A, B, C and Z shares
respectively, payable on December 18, 1997 to shareholders of record on December
15, 1997.
- --------------------------------------------------------------------------------
B-55
<PAGE>
To the Shareholders and Board of Directors of Prudential Emerging
Growth Fund, Inc.
1177 Avenue of the Americas
New York, NY
December 19, 1997
B-56
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
------------ ------------ ------------ ------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996(a) 1996(a) 1996(a) 1996(a)
THROUGH THROUGH THROUGH THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
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................ (.08) (.14) (.14) (.03)
Net realized and unrealized loss
on investment transactions........ 2.00 1.99 1.99 1.96
------------ ------------ ------------ ------------
Total from investment
operations.................... 1.92 1.85 1.85 1.93
------------ ------------ ------------ ------------
Net asset value, end of period..... $ 11.92 $ 11.85 $ 11.85 $ 11.93
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN(c):................... 19.20% 18.50% 18.50% 19.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $33,124 $82,070 $ 6,477 $ 561
Average net assets (000)........... $28,141 $67,420 $ 5,526 $ 261
Ratios to average net assets(b):
Expenses, including
distribution fees............. 1.46% 2.21% 2.21% 1.21%
Expenses, excluding
distribution fees............. 1.21% 1.21% 1.21% 1.21%
Net investment loss............ (.92)% (1.67)% (1.69)% (.73)%
Portfolio turnover rate............ 107% 107% 107% 107%
Average commission rate paid
per share......................... $ .0521 $ .0521 $ .0521 $ 0.521
</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-57
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF APRIL 30, 1998 (UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
LONG-TERM INVESTMENTS--98.5%
COMMON STOCKS--98.5%
- ---------------------------------------------------------------
AEROSPACE--1.6%
43,000 Orbital Sciences Corp. (a) $ 1,913,500
22,600 TriStar Aerospace Co. (a) 361,600
------------
2,275,100
- ---------------------------------------------------------------
BROADCASTING--7.6%
38,800 Jacor Communications, Inc. (a) 2,206,750
75,000 Liberty Media Group, Inc. 2,489,062
30,000 Sinclair Broadcast Group, Inc. (a) 1,556,250
45,200 Univision Communications, Inc. 1,731,725
100,000 USA Networks, Inc. (a) 2,456,250
11,300 Westwood One, Inc. (a) 339,000
------------
10,779,037
- ---------------------------------------------------------------
CABLE & PAY TELEVISION SYSTEMS--3.8%
23,000 Cablevision Systems Corp. (a) 1,413,063
5,600 TCA Cable TV, Inc. 345,800
50,000 U.S. WEST Media Group (a) 1,887,500
40,000 United Video Satellite Group, Inc.
(a) 1,747,500
------------
5,393,863
- ---------------------------------------------------------------
COMMERCIAL SERVICES--2.5%
45,000 Gartner Group, Inc. (a) 1,490,625
40,000 Lason Holdings, Inc. 1,560,000
8,800 Paychex, Inc. 477,950
------------
3,528,575
- ---------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--17.7%
40,000 Avid Technology, Inc. (a) 1,735,000
30,000 C-NET Inc. (a) 997,500
51,900 Checkfree Holdings Corp. (a) 1,336,425
49,300 DST Systems, Inc. (a) 2,717,662
22,900 Excite, Inc. (a) 1,531,438
44,000 Harbinger Corp. (a) 1,600,500
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
25,700 ONSALE, Inc. (a) $ 647,319
32,000 Parametric Technology Corp. (a) 1,023,000
45,600 Pixar, Inc. (a) 1,892,400
30,000 Policy Management Systems Corp. (a) 2,418,750
55,300 Rational Software Corp. (a) 929,731
50,000 Sterling Commerce, Inc. 2,128,125
68,500 Synopsys, Inc. (a) 2,945,500
65,000 The Learning Company, Inc. (a) 1,860,625
57,200 Unisys Corp. (a) 1,283,425
------------
25,047,400
- ---------------------------------------------------------------
DATA PROCESSING & REPRODUCTION--1.0%
57,000 May & Speh Inc. (a) 847,875
23,500 Security Dynamics Technologies,
Inc. (a) 566,938
------------
1,414,813
- ---------------------------------------------------------------
ELECTRONICS--14.5%
1 Analog Devices, Inc. (a) 39
17,100 Atmel Corp. (a) 345,206
67,500 Burr-Brown Corp. (a) 2,054,531
67,700 Cognex Corp. (a) 1,637,494
35,300 Gemstar International Group Ltd.
(a) 1,363,462
700 Hadco Corp. (a) 26,775
35,400 International Rectifier Corp. (a) 415,950
69,500 Jabil Circuit, Inc. (a) 2,441,187
20,000 Lattice Semiconductor Corp. (a) 912,500
40,000 Lexmark International Group, Inc.
(a) 2,315,000
28,500 LSI Logic Corp. (a) 773,063
45,600 Maxim Integrated Products, Inc. (a) 1,841,100
12,500 North American Scientific, Inc. (a) 437,500
33,500 Solectron Corp. (a) 1,484,469
29,700 SpeedFam International, Inc. 861,300
75,000 Symbol Technologies, Inc. 2,887,500
20,000 Teradyne, Inc. (a) 730,000
------------
20,527,076
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF APRIL 30, 1998 (UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
ENTERTAINMENT--2.4%
43,000 Royal Caribbean Cruises Ltd. $ 2,940,125
56,700 Sports Club Company, Inc. (a) 457,144
------------
3,397,269
- ---------------------------------------------------------------
FINANCIAL SERVICES--8.9%
14,200 Freedom Securities Corp. (a) 315,063
34,200 GreenPoint Financial Corp. 1,357,312
25,100 H&R Block, Inc. 1,129,500
1 Legg Mason, Inc. 59
58,200 Metzler Group, Inc. (a) 2,015,175
21,100 Provident Financial Group, Inc. 1,116,981
50,057 Romac International, Inc. (a) 1,326,511
78,100 Select Appointments Holdings
(U.K.)(ADR) 2,118,462
44,200 Sirrom Capital Corp. 1,320,475
36,000 Sovereign Bancorp, Inc. 679,500
50,900 Waddell & Reed Financial, Inc. 1,259,775
------------
12,638,813
- ---------------------------------------------------------------
FOODS--0.9%
60,000 Flowers Industries, Inc. 1,282,500
- ---------------------------------------------------------------
HMO'S--3.7%
80,000 American Oncology Resources, Inc.
(a) 1,200,000
60,000 Concentra Managed Care, Inc. (a) 1,867,500
100,000 Medaphis Corp. (a) 918,750
57,000 PhyCor, Inc. (a) 1,296,750
------------
5,283,000
- ---------------------------------------------------------------
LODGING--1.0%
40,000 Four Seasons Hotels, Inc. 1,362,500
- ---------------------------------------------------------------
MANUFACTURING--3.5%
52,100 St. John Knits, Inc. 2,324,963
80,000 WestPoint Stevens, Inc. 2,680,000
------------
5,004,963
- ---------------------------------------------------------------
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
MEDICAL SERVICES--3.8%
25,400 Covance, Inc. (a) $ 544,513
21,600 IMPATH, Inc. (a) 804,600
37,100 Pediatric Services of America, Inc. 704,900
80,100 Total Renal Care Holdings, Inc. (a) 2,653,312
42,700 TLC The Laser Center Inc. (a) 704,550
------------
5,411,875
- ---------------------------------------------------------------
MEDICAL TECHNOLOGY--6.6%
34,200 Barr Laboratories, Inc. (a) 1,387,237
28,500 COR Therapeutics, Inc. (a) 537,938
20,000 Incyte Pharmaceuticals, Inc. (a) 900,000
40,000 Mentor Corp. 1,087,500
80,000 Mylan Laboratories 2,170,000
43,200 STERIS Corp. (a) 2,540,700
33,400 ThermoTrex Corp. (a) 665,912
------------
9,289,287
- ---------------------------------------------------------------
OPTICAL TECHNOLOGY--2.0%
28,200 Ocular Sciences, Inc. (a) 789,600
50,000 Sola International, Inc. (a) 2,125,000
------------
2,914,600
- ---------------------------------------------------------------
PHARMACEUTICALS--4.4%
34,200 Elan Corp. PLC (Ireland)(ADR) 2,124,675
68,232 PharMerica, Inc. (a) 946,719
20,000 Teva Pharmaceutical Industries Ltd.
(Israel) (ADR) 855,000
54,300 Watson Pharmaceuticals, Inc. (a) 2,334,900
------------
6,261,294
- ---------------------------------------------------------------
PRECIOUS METALS--0.4%
22,800 Stillwater Mining Co. (a) 602,775
- ---------------------------------------------------------------
PUBLISHING--0.9%
47,200 The Petersen Companies Inc. 1,227,200
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF APRIL 30, 1998 (UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
Retail--5.7%
50,000 BJ's Wholesale Club, Inc. (a) $ 2,003,125
30,000 Brylane Inc. (a) 1,762,500
23,000 Consolidated Stores Corp. (a) 920,000
45,000 Genesco Inc. (a) 762,187
40,000 Office Depot, Inc. (a) 1,325,000
50,000 Pier 1 Imports, Inc. 1,318,750
------------
8,091,562
- ---------------------------------------------------------------
SCHOOLS--0.4%
14,000 DeVry, Inc. (a) 530,250
- ---------------------------------------------------------------
TELECOMMUNICATIONS--3.0%
50,000 Cincinnati Bell, Inc. 1,912,500
50,000 e.spire Communications Inc. 950,000
69,300 Transaction Network Services, Inc.
(a) 1,411,988
------------
4,274,488
- ---------------------------------------------------------------
TRANSPORTATION/SHIPPING--2.2%
100,000 Fritz Companies, Inc. (a) 1,462,500
37,500 Kansas City Southern Industries,
Inc. 1,694,531
------------
3,157,031
Total long-term investments
(cost $111,918,061) 139,695,271
------------
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.3%
REPURCHASE AGREEMENT
$ 1,818 Joint Repurchase Agreement Account,
5.50%, 5/1/98
(cost $1,818,000; Note 5) $ 1,818,000
------------
- ---------------------------------------------------------------
TOTAL INVESTMENTS--99.8%
(cost $113,736,061; Note 4) 141,513,271
Other assets in excess of
liabilities--0.2% 276,342
------------
Net Assets--100% $141,789,613
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS APRIL 30, 1998
---------------
<S> <C>
Investments, at value (cost $113,736,061)................................................................... $141,513,271
Cash........................................................................................................ 718,301
Receivable for Fund shares sold............................................................................. 847,468
Deferred expenses and other assets.......................................................................... 90,070
Receivable for investments sold............................................................................. 55,461
Dividends and interest receivable........................................................................... 21,635
--------------
Total assets............................................................................................. 143,246,206
--------------
LIABILITIES
Payable for investments purchased........................................................................... 799,100
Payable for Fund shares reacquired.......................................................................... 456,934
Distribution fee payable.................................................................................... 90,548
Management fee payable...................................................................................... 68,440
Accrued expenses............................................................................................ 40,437
Foreign withholding tax payable............................................................................. 1,134
--------------
Total liabilities........................................................................................ 1,456,593
--------------
NET ASSETS.................................................................................................. $141,789,613
--------------
--------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 10,509
Paid-in capital in excess of par......................................................................... 107,223,989
--------------
107,234,498
Accumulated net investment loss.......................................................................... (931,936)
Accumulated net realized gain on investments............................................................. 7,709,841
Net unrealized appreciation on investments............................................................... 27,777,210
--------------
Net assets, April 30, 1998.................................................................................. $141,789,613
--------------
--------------
Class A:
Net asset value and redemption price per share
($37,746,575 DIVIDED BY 2,776,777 shares of common stock issued and outstanding)...................... $13.59
Maximum sales charge (5% of offering price).............................................................. .72
--------------
Maximum offering price to public......................................................................... $14.31
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($95,464,577 DIVIDED BY 7,095,462 shares of common stock issued and outstanding)...................... $13.45
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($7,421,243 DIVIDED BY 551,560 shares of common stock issued and outstanding)......................... $13.46
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($1,157,218 DIVIDED BY 84,857 shares of common stock issued and outstanding).......................... $13.64
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
NET INVESTMENT LOSS APRIL 30, 1998
--------------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $1,249)....................... $ 119,365
Interest.................................. 86,053
--------------
Total income........................... 205,418
--------------
Expenses
Management fee............................ 380,673
Distribution fee--Class A................. 41,940
Distribution fee--Class B................. 428,625
Distribution fee--Class C................. 34,419
Transfer agent's fees and expenses........ 82,000
Registration fees......................... 47,500
Custodian's fees and expenses............. 45,000
Reports to shareholders................... 36,000
Amortization of deferred organizational
costs.................................. 12,096
Legal fees................................ 10,000
Audit fees................................ 10,000
Directors' fees........................... 8,000
Miscellaneous............................. 1,101
--------------
Total expenses......................... 1,137,354
--------------
Net investment loss.......................... (931,936)
--------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investment
transactions.............................. 8,405,647
Net unrealized appreciation on investments... 11,480,982
--------------
Net gain on investments...................... 19,886,629
--------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................... $ 18,954,693
--------------
--------------
</TABLE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS DECEMBER 31, 1996(a)
INCREASE (DECREASE) ENDED THROUGH
IN NET ASSETS APRIL 30, 1998 OCTOBER 31, 1997
-------------- --------------------
<S> <C> <C>
Operations
Net investment loss.................. $ (931,936) $ (1,246,243)
Net realized gain on
investments....................... 8,405,647 2,613,615
Net unrealized appreciation
on investments.................... 11,480,982 16,296,228
-------------- --------------------
Net increase in net assets
resulting from
operations........................ 18,954,693 17,663,600
-------------- --------------------
Dividends and Distributions (Note 1)
Distributions from net
realized gains
Class A........................... (590,230) --
Class B........................... (1,495,125) --
Class C........................... (125,163) --
Class Z........................... (10,737) --
-------------- --------------------
(2,221,255) --
-------------- --------------------
Fund share transactions (net
of share conversions) (Note 6)
Net proceeds from shares
sold.............................. 23,052,668 133,828,498
Net asset value of shares
issued in reinvestment
of distributions.................. 2,134,825 --
Cost of shares
reacquired........................ (22,362,207) (29,361,209)
-------------- --------------------
Net increase in net assets
from Fund share
transactions...................... 2,825,286 104,467,289
-------------- --------------------
Total increase.......................... 19,558,724 122,130,889
NET ASSETS
Beginning of period..................... 122,230,889 100,000
-------------- --------------------
End of period........................... $ 141,789,613 $122,230,889
-------------- --------------------
-------------- --------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-62
<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 diversified, open-end management investment
company. The Fund was incorporated in Maryland on August 23, 1996. The Fund
issued 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 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: Securities listed on a securities exchange (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, at the mean between the
closing bid and asked prices on such day, or at the bid price in the absence of
an asked price as provided by a pricing service. Securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued by an independent
pricing service. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by a principal market maker
or independent pricing agent. Options on securities and indices traded on an
exchange are valued at the mean between the most recently quoted bid and asked
prices provided by the respective exchange. Futures contracts and options
thereon are valued at the last sales price as of the close of business of the
exchange. Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
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 securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
Net investment income (loss), other than distribution fees, and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of the
day.
DIVIDENDS AND DISTRIBUTIONS: 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.
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").
- --------------------------------------------------------------------------------
B-63
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
PIC furnishes investment advisory services, in connection with the management of
the Fund. PIFM pays for the cost of the subadviser's services, the compensation
of officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .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 are accrued daily and payable monthly.
No distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were charged at an annual rate of .25 of 1%, 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively, for the six months ended April 30, 1998.
PSI has advised the Fund that it has received approximately $82,700 in front-end
sales charges resulting from sales of Class A shares for the six months ended
April 30, 1998. From these fees, PSI paid such sales charges to dealers, which
in turn paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the six months ended April 30, 1998, it
received approximately $123,400 and $1,900 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") with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. Interest on
any such borrowings outstanding will be at market rates. The purpose of the
Agreement is to serve as an alternative source of funding for capital share
redemptions. The Fund did not borrow any amounts pursuant to the Agreement
during the six months ended April 30, 1998. The Funds pay a commitment fee at an
annual rate of .055 of 1% on the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro-rata basis by the Funds.
The Agreement expired on December 30, 1997 and has been extended through
December 29, 1998 under the same terms.
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 PIFM,
serves as the Fund's transfer agent. During the six months ended April 30, 1998,
the Fund incurred fees of approximately $77,000 for the services of PMFS. As of
April 30, 1998, approximately $14,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also include certain
out-of-pocket expenses paid to nonaffiliates.
During the six months ended April 30, 1998, PSI received approximately $5,754 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the six months ended April 30, 1998 were $123,753,112 and $122,913,961,
respectively.
The cost basis of investments for federal income tax purposes is $114,132,947.
As of April 30, 1998, net unrealized appreciation of investments for federal
income tax purposes was $27,380,324 (gross unrealized appreciation--$29,301,090;
gross unrealized depreciation--$1,920,766).
- ------------------------------------------------------------
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, 1998, the Fund
had a 0.2% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represented $1,818,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor were as follows:
Bear, Stearns & Co., Inc., 5.53%, in the principal amount of $310,000,000,
repurchase price $310,047,619, due 5/1/98. The value of the collateral including
accrued interest was $316,688,713.
Credit Suisse First Boston Corp., 5.54%, in the principal amount of
$310,000,000, repurchase price $310,047,706, due 5/1/98. The value of the
collateral including accrued interest was $321,763,994.
- --------------------------------------------------------------------------------
B-64
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
J.P. Morgan Securities Inc., 5.53%, in the principal amount of $310,000,000,
repurchase price $310,047,619, due 5/1/98. The value of the collateral including
accrued interest was $316,200,983.
UBS Securities LLC, 5.375%, in the principal amount of $218,770,000, repurchase
price $218,802,664, due 5/1/98. The value of the collateral including accrued
interest was $223,146,143.
- ------------------------------------------------------------
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. Special exchange privileges are also available for shareholders who
qualify to purchase Class A shares at net asset value. Class Z shares are not
subject to any sales or redemption charge and are offered exclusively for sale
to a limited group of investors.
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 six months ended April 30, 1998
were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- ---------- ------------
<S> <C> <C>
Six months ended April 30, 1998:
Shares sold.......................... 750,615 $ 9,434,453
Shares issued in reinvestment of
distributions...................... 50,213 576,443
Shares reacquired.................... (831,873) (10,217,419)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (31,045) (206,523)
Shares issued upon conversion from
Class B............................ 29,265 375,616
---------- ------------
Net decrease in shares outstanding... (1,780) $ 169,093
---------- ------------
---------- ------------
<CAPTION>
Class A SHARES AMOUNT
- ------- ---------- ------------
<S> <C> <C>
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 4,426,371 $ 46,029,734
Shares reacquired.................... (1,709,715) (18,558,290)
---------- ------------
Net increase in shares outstanding
before conversion.................. 2,716,656 27,471,444
Shares issued upon conversion from
Class B............................ 59,401 693,915
---------- ------------
Net increase in shares outstanding... 2,776,057 $ 28,165,359
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------
<S> <C> <C>
Six months ended April 30, 1998:
Shares sold.......................... 903,582 $ 11,206,849
Shares issued in reinvestment of
distributions...................... 125,018 1,425,202
Shares reacquired.................... (831,288) (10,169,168)
---------- ------------
Net increase in shares outstanding
before conversion.................. 197,312 2,462,883
Shares reacquired upon conversion
into Class A....................... (29,520) (375,616)
---------- ------------
Net increase in shares outstanding... 167,792 $ 2,087,267
---------- ------------
---------- ------------
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 7,897,636 $ 80,935,138
Shares reacquired.................... (912,794) (9,938,884)
---------- ------------
Net increase in shares outstanding
before conversion.................. 6,984,842 70,996,254
Shares issued upon conversion from
Class A............................ (59,672) (693,915)
---------- ------------
Net increase in shares outstanding... 6,925,170 $ 70,302,339
---------- ------------
---------- ------------
<CAPTION>
Class C
- -------
<S> <C> <C>
Six months ended April 30, 1998:
Shares sold.......................... 142,320 $ 1,796,605
Shares issued in reinvestment of
distributions...................... 10,740 122,442
Shares reacquired.................... (148,201) (1,842,818)
---------- ------------
Net increase in shares outstanding... 4,859 $ 76,229
---------- ------------
---------- ------------
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 603,231 $ 6,123,875
Shares reacquired.................... (59,030) (606,543)
---------- ------------
Net increase in shares outstanding... 544,201 $ 5,517,332
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-65
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z SHARES AMOUNT
- ------- ---------- ------------
<S> <C> <C>
Six months ended April 30, 1998:
Shares sold.......................... 47,533 $ 614,761
Shares issued in reinvestment of
distributions...................... 934 10,738
Shares reacquired.................... (10,596) (132,802)
---------- ------------
Net increase in shares outstanding... 37,871 $ 492,697
---------- ------------
---------- ------------
December 31, 1996(a) through
October 31, 1997:
Shares sold.......................... 68,252 $ 739,751
Shares reacquired.................... (23,766) (257,492)
---------- ------------
Net increase in shares outstanding... 44,486 $ 482,259
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
B-66
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------- ----------------------------
DECEMBER 31, DECEMBER 31,
SIX MONTHS 1996(a) SIX MONTHS 1996(a)
ENDED THROUGH ENDED THROUGH
APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31,
1998 1997 1998 1997
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.92 $ 10.00 $ 11.85 $ 10.00
---------- ------ ---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss........................... (.06) (.08) (.10) (.14)
Net realized and unrealized gain on investment
transactions............................... 1.94 2.00 1.91 1.99
---------- ------ ---------- ------
Total from investment operations........... 1.88 1.92 1.81 1.85
---------- ------ ---------- ------
LESS DISTRIBUTIONS
Distributions from net realized gains on
investment transactions.................... (.21) -- (.21) --
---------- ------ ---------- ------
Total distributions........................ (.21) -- (.21) --
---------- ------ ---------- ------
Net asset value, end of period................ $ 13.59 $ 11.92 $ 13.45 $ 11.85
---------- ------ ---------- ------
---------- ------ ---------- ------
TOTAL RETURN(c):.............................. 16.14% 19.20% 15.63% 18.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 37,747 $ 33,124 $ 95,465 $ 82,070
Average net assets (000)...................... $ 33,830 $ 28,141 $ 86,435 $ 67,420
Ratios to average net assets(b):
Expenses, including distribution fees...... 1.25% 1.46% 2.00% 2.21%
Expenses, excluding distribution fees...... 1.00% 1.21% 1.00% 1.21%
Net investment loss........................ (.92)% (.92)% (1.67)% (1.67)%
Portfolio turnover rate.................... 97% 107% 97% 107%
<CAPTION>
CLASS C CLASS Z
------------------------ ---------------------------
DECEMBER 31, DECEMBER 31,
SIX MONTHS 1996(a) SIX MONTHS 1996(a)
ENDED THROUGH ENDED THROUTH
APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31,
1998 1997 1998 1997
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.85 $10.00 $ 11.93 $10.00
---------- ----- ---------- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment loss........................... (.10) (.14) (.09) (.03)
Net realized and unrealized gain on investment
transactions............................... 1.92 1.99 2.01 1.96
---------- ----- ---------- -----
Total from investment operations........... 1.82 1.85 1.92 1.93
---------- ----- ---------- -----
LESS DISTRIBUTIONS
Distributions from net realized gains on
investment transactions.................... (.21) -- (.21) --
---------- ----- ---------- -----
Total distributions........................ (.21) -- (.21) --
---------- ----- ---------- -----
Net asset value, end of period................ $ 13.46 $11.85 $ 13.64 $11.93
---------- ----- ---------- -----
---------- ----- ---------- -----
TOTAL RETURN(c):.............................. 15.63% 18.50% 16.46% 19.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 7,421 $6,477 $ 1,157 $ 561
Average net assets (000)...................... $ 6,941 $5,526 $ 736 $ 261
Ratios to average net assets(b):
Expenses, including distribution fees...... 2.00% 2.21% 1.00% 1.21%
Expenses, excluding distribution fees...... 1.00% 1.21% 1.00% 1.21%
Net investment loss........................ (1.67)% (1.69)% (.67)% (.73)%
Portfolio turnover rate.................... 97% 107% 97% 107%
</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-67
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
EDGAR Representation of Chart
Ending Value
Small Stocks $5,519.97
Common Stocks $1,828.33
Long-Term Bonds $39.07
Treasury Bills $14.25
Inflation $9.02
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All righs reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
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 September 30, 1982
with an ending value on September 30, 1998.
[CHART]
S&P Midcap 400 = $13,880
S&P 500 = $12,918
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.
II-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 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5%
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2%
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8%
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)%
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7% 17.12
</TABLE>
(1)Lehman Brothers Treasury Bond Index is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5)Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-3
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from December 31, 1986 through December 31, 1997. It does not represent
the performance of any Prudential Mutual Fund.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
The Netherlands 20.5%
Sweden 20.4%
Spain 20.4%
Hong Kong 19.7%
Belgium 19.5%
Switzerland 17.9%
USA 17.1%
UK 16.6%
France 15.6%
Germany 12.1%
Austria 9.6%
Japan 6.6%
</TABLE>
Source: Morgan Stanley Capital International (MSCI), and Lipper Analytical
Services Inc. as of 12/31/97. 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Appreciation and Reinvesting
Dividends $304,596
Capital Appreciation only $105,413
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is 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.
II-4
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 2.5%
U.S. 49.8%
Pacific
Basin 15.6%
Europe 32.1%
</TABLE>
Source: Morgan Stanley Capital International, December 31, 1998. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[CHART]
- -------------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1996. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
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,
1976 through December 31, 1996. 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
& BOND
INDICES OVER THE PAST 20 YEARS
(12/31/76-12/31/96)*
<S> <C> <C>
S&P 500 37.6% -7.2%
EAFE 69.9% -23.2%
Lehman Aggregate 32.6% -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.
II-5
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "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,
1997 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,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people worldwide.
Long one of the largest issuers of individual life insurance, the Prudential has
25 million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
approximately 1.5 million cars and insures approximately 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments a business group of Prudential (of which
Prudential Mutual Funds is a key part) manages over $211 billion in assets of
institutions and individuals. In PENSION & INVESTMENTS, May 12, 1997, Prudential
was ranked third in terms of total assets under management.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents and more than 1,100 offices throughout the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of Prudential, has over $1 billion in assets and serves nearly 1.5
million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997, Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
- ---------------
(1)PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global Utility
Fund, Inc., Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as one of the
subadvisers to The Prudential Investment Portfolios, Inc. and Mercator Asset
Management LP, as the subadviser to International Stock Series, a portfolio of
Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.
(2)As of December 31, 1996.
III-1
<PAGE>
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 LLC, a premier institutional equity manager
and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
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, LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at Prudential Securities.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas.
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Three
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------------
(7)As of December 31, 1997.
(8)On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research directors,
asking them to evaluate analysts in 76 industry sectors. Scores are produced by
taking the number of votes awarded to an individual analyst and weighting them
based on the size of the voting institution. In total, the magazine sends its
survey to approximately 2,000 institutions and a group of European and Asian
institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(b) EXHIBITS:
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment.(2)
(b) By-Laws.(2)
(c) Instruments defining rights of shareholders.(2)
(d) (1) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.
(e) (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.*
(2) Selected Dealer Agreement.*
(f) Not Applicable.
(g) Custodian Contract between the Registrant and State Street Bank and
Trust Company.(2)
(h) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.(2)
(i) Not Applicable.
(m) (a) Amended and Restated Distribution and Service Plan for Class A
Shares.*
(b) Amended and Restated Distribution and Service Plan for Class B
Shares.*
(c) Amended and Restated Distribution and Service Plan for Class C
Shares.*
(n) Financial Data Schedules filed as Exhibit 27 for electronic purposes.*
(o) Amended Rule 18f-3 Plan.*
- ------------------------
(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).
(3) Incorporated by reference to the Registrant's Post-Effective Amendment No.
1 to its Registration Statement on Form N-1A filed via EDGAR on or about
May 30, 1997 (File Nos. 333-11785 and 811-07811).
* Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. 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 (b) 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
C-1
<PAGE>
Distribution Agreement (Exhibit (e) 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 (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) 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.
C-2
<PAGE>
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC
See "How the Fund Is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this Registration
Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, NJ
07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATION
- ------------------------ ------------------------------------ ------------------------------------------------------
<S> <C> <C>
Robert F. Gunia Executive Vice President and Vice President, Prudential Investments; Executive
Treasurer Vice President and Treasurer, PIFM;
Senior Vice President, Prudential Securities
Neil A. McGuinness Executive Vice President Executive Vice President and Director of
Marketing, PMF&A; Executive Vice
President, PIFM
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 J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice
President, PIFM
</TABLE>
(b) The Prudential Investment Corporation
See "How the Fund Is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory and
Other Services" 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)
John R. Strangfeld, Jr. Vice President and Senior Vice President, Prudential; Vice President and
Director Director, PIC; President of Private Asset Management
Group of Prudential
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Money Fund, Command
Government Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc.,
Global Utility Fund, Inc., Nicholas Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity
C-3
<PAGE>
Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis
Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential Government
Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield
Fund, Inc., Prudential High Yield Total Return Fund, Inc., Prudential Index
Series Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential International Bond Fund, Inc.,
Prudential Mid-Cap Value Fund, Prudential MoneyMart Assets, Inc., Prudential
Mortgage Income Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural
Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Real
Estate Securities Fund, Prudential Small-Cap Quantum Fund, Inc., Prudential
Small Company Value Fund, Inc., Prudential Special Money Market Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential 20/20 Focus Fund,
Prudential Tax-Free Money Fund, Prudential Utility Fund, Inc., Prudential World
Fund, Inc., The Prudential Investment Portfolios, Inc. and The Target Portfolio
Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME (1) UNDERWRITER REGISTRANT
---------------------------------------- ---------------------------------------- -------------
<S> <C> <C>
E. Michael Caulfield.................... President None
Mark R. Fetting......................... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Jean D. Hamilton........................ Executive Vice President None
Ronald P. Joelson....................... Executive Vice President None
Brian M. Storms......................... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
John R. Strangfeld...................... Executive Vice President None
Mario A. Mosse.......................... Senior Vice President and Chief None
Operating Officer
Scott S. Wallner........................ Vice President, Secretary and Chief None
Legal Officer
Michael G. Williamson................... Vice President, Comptroller and Chief None
Financial Officer
C. Edward Chaplin....................... Treasurer None
</TABLE>
- ------------------------
(1) The address of each person named is 751 Broad Street, Newark, New Jersey
07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. 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 07102, the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and Prudential Mutual
Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837. 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, 100
Mulberry Street, Newark, New
C-4
<PAGE>
Jersey 07102-4077, and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund Is
Managed--Manager" and "How the Fund Is Managed-- Distributor" in the Prospectus
and the caption "Investment Advisory and Other Services" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 30. UNDERTAKING
Not applicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Fund has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Newark and State of New Jersey, on the 29th day of
October, 1998.
PRUDENTIAL EMERGING GROWTH FUND, INC.
By /s/ RICHARD A. REDEKER
------------------------------------------
Richard A. Redeker
PRESIDENT
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ EDWARD D. BEACH
- ------------------------------ Director October 29, 1998
Edward D. Beach
/s/ DELAYNE DEDRICK GOLD
- ------------------------------ Director October 29, 1998
Delayne Dedrick Gold
/s/ ROBERT F. GUNIA
- ------------------------------ Director October 29, 1998
Robert F. Gunia
/s/ DOUGLAS H. MCCORKINDALE
- ------------------------------ Director October 29, 1998
Douglas H. McCorkindale
/s/ MENDEL A. MELZER
- ------------------------------ Director October 29, 1998
Mendel A. Melzer
/s/ THOMAS T. MOONEY
- ------------------------------ Director October 29, 1998
Thomas T. Mooney
/s/ STEPHEN P. MUNN
- ------------------------------ Director October 29, 1998
Stephen P. Munn
/s/ RICHARD A. REDEKER
- ------------------------------ President and Director October 29, 1998
Richard A. Redeker
/s/ ROBIN B. SMITH
- ------------------------------ Director October 29, 1998
Robin B. Smith
/s/ LOUIS A. WEIL, III
- ------------------------------ Director October 29, 1998
Louis A. Weil, III
/s/ CLAY T. WHITEHEAD
- ------------------------------ Director October 29, 1998
Clay T. Whitehead
/s/ GRACE C. TORRES Treasurer and Principal
- ------------------------------ Financial and Accounting October 29, 1998
Grace C. Torres Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S>
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment.(2)
(b) By-Laws.(2)
(c) Instruments defining rights of shareholders.(2)
(d) (1) Management Agreement between the Registrant and Prudential Mutual Fund Management, Inc.*
(2) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential
Investment Corporation.*
(e) (1) Distribution Agreement between the Registrant and Prudential Investment Management Services
LLC.*
(2) Selected Dealer Agreement.*
(f) Not Applicable.
(g) Custodian Contract between the Registrant and State Street Bank and Trust Company.(2)
(h) Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund Services,
Inc.(2)
(i) Not Applicable.
(m) (1) Amended and Restated Distribution and Service Plan for Class A Shares.*
(2) Amended and Restated Distribution and Service Plan for Class B Shares.*
(3) Amended and Restated Distribution and Service Plan for Class C Shares.*
(n) Financial Data Schedules filed as Exhibit 27 for electronic purposes.*
(o) Amended Rule 18f-3 Plan.*
</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 on or about October 30, 1996
(File Nos. 333-11785 and 811-07811).
(3) Incorporated by reference to the Registrant's Post-Effective Amendment No.
1 to its Registration Statement on Form N-1A filed via EDGAR on or about
May 30, 1997 (File Nos. 333-11785 and 811-07811).
* Filed herewith.
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
MANAGEMENT AGREEMENT
Agreement made as of the 12th day of October, 1996 between Prudential
Emerging Growth Fund, Inc., a Maryland corporation (the Fund), and Prudential
Mutual Fund Management, LLC, a New York limited liability company (the Manager).
WITNESSETH
WHEREAS, the Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the 1940 Act);
and
WHEREAS, the Fund desires to retain the Manager to render or contract to
obtain as hereinafter provided investment advisory services to the Fund and the
Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day to day corporate affairs, and the
Manager is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund and
administrator of its corporate affairs for the period and on the terms set forth
in this Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided. The Manager is
authorized to enter into an agreement with The Prudential Investment Corporation
(PIC) pursuant to which PIC shall furnish to the Fund the investment advisory
services in connection with the management of the Fund (the Subadvisory
Agreement). The Manager will continue to
<PAGE>
have responsibility for all investment advisory services furnished pursuant to
the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund, the
Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus (hereinafter defined) of the Fund and
with the instructions and directions of the Board of Directors of the Fund
and will conform to and comply with the requirements of the 1940 Act and
all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by the Fund and will place orders pursuant to its
determinations
2
<PAGE>
with or through such persons, brokers, dealers or futures commission
merchants (including but not limited to Prudential Securities Incorporated)
in conformity with the policy with respect to brokerage as set forth in the
Fund's Registration Statement and Prospectus (hereinafter defined) or as
the Board of Directors may direct from time to time. In providing the Fund
with investment supervision, it is recognized that the Manager will give
primary consideration to securing the most favorable price and efficient
execution. Consistent with this policy, the Manager may consider the
financial responsibility, research and investment information and other
services provided by brokers, dealers or futures commission merchants who
may effect or be a party to any such transaction or other transactions to
which other clients of the Manager may be a party. It is understood that
Prudential Securities Incorporated may be used as principal broker for
securities transactions but that no formula has been adopted for allocation
of the Fund's investment transaction business. It is also understood that
it is desirable for the Fund that the Manager have access to supplemental
investment and market research and security and economic analysis provided
by brokers or futures commission merchants and that such brokers may
execute brokerage transactions at a higher cost to the Fund than may result
when allocating brokerage to other brokers or futures commission merchants
on the basis of seeking the most favorable price and efficient execution.
Therefore, the Manager is authorized to pay higher brokerage commissions
for the purchase and sale of securities and futures contracts for the Fund
to brokers or futures commission merchants who provide such research and
analysis, subject to review by the Fund's
3
<PAGE>
Board of Directors from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided
by such broker or futures commission merchant may be useful to the Manager
in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security
or a futures contract to be in the best interest of the Fund as well as
other clients of the Manager or the Subadviser, the Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities or futures contracts to be so sold
or purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities or futures contracts so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Fund's Board of
Directors such periodic and special reports as the Board may reasonably
request.
(e) The Manager shall be responsible for the financial and accounting
records to be maintained by the Fund (including those being maintained by
the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets.
4
<PAGE>
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the following
documents and will deliver to it all future amendments and supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary
of State of Maryland (such Articles of Incorporation, as in effect on the
date hereof and as amended from time to time, are herein called the
"Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof
and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund
authorizing the appointment of the Manager and approving the form of this
agreement;
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-1A (the Registration Statement), as filed
with the Securities and Exchange Commission (the Commission) relating to
the Fund and shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its officers and employees
5
<PAGE>
who may be elected as directors or officers of the Fund to serve in the
capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however that the Manager may retain a copy of such records. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records as are required to be maintained by the Manager
pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the following
expenses:
(i) the salaries and expenses of all personnel of the Fund and the
Manager except the fees and expenses of directors who are not affiliated
persons of the Manager or the Fund's investment adviser,
(ii) all expenses incurred by the Manager or by the Fund in connection
with managing the ordinary course of the Fund's business other than those
assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the
Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the
6
<PAGE>
management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not affiliated persons
of the Manager or the Fund's investment adviser,
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund and
the providing of any such records to the Manager useful to the Manager in
connection with the Manager's responsibility for the accounting records of
the Fund pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the Fund, including the cost
of any pricing service or services which may be retained pursuant to the
authorization of the Board of Directors of the Fund, and (iv) for both mail
and wire orders, the cashiering function in connection with the issuance
and redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal, state
or other governmental agencies,
7
<PAGE>
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of stock certificates representing, and/or non-negotiable
share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and Exchange
Commission, registering the Fund as a broker or dealer and qualifying its
shares under state securities laws, including the preparation and printing
of the Fund's registration statements, prospectuses and statements of
additional information for filing under federal and state securities laws
for such purposes,
(1) allocable communications expenses with respect to investor
services and all expenses of shareholders' and directors' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to the Manager but excluding interest, taxes,
brokerage commissions, distribution fees and litigation and indemnification
expenses and other extraordinary expenses not
8
<PAGE>
incurred in the ordinary course of the Fund's business) exceed the lowest
applicable annual expense limitation established and enforced pursuant to the
statute or regulations of any jurisdictions in which shares of the Fund are then
qualified for offer and sale, the compensation due the Manager will be reduced
by the amount of such excess, or, if such reduction exceeds the compensation
payable to the Manager, the Manager will pay to the Fund the amount of such
reduction which exceeds the amount of such compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Manager as full compensation therefor a fee
at an annual rate of .60 of 1% of the Fund's average daily net assets. This fee
will be computed daily and will be paid to the Manager monthly. Any reduction in
the fee payable and any payment by the Manager to the Fund pursuant to paragraph
7 shall be made monthly. Any such reductions or payments are subject to
readjustment during the year.
9. The Manager shall not be liable for any error of judgment or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that
9
<PAGE>
this Agreement may be terminated by the Fund at any time, without the payment
of any penalty, by the Board of Directors of the Fund or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager at any time, without the payment of any penalty,
on not more than 60 days' nor less than 30 days' written notice to the other
party. This Agreement shall terminate automatically in the eve of its
assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of
any officer or employee of the Manager who may also be a director, officer or
employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any
business, whether of a similar or dissimilar nature, nor limit or restrict
the right of the Manager to engage in any other business or to render
services of any kind to any other corporation, firm, individual or
association.
12. Except as otherwise provided herein or authorized by the Board
of Directors of the Fund from time to time, the Manager shall for all
purposes herein be deemed to be an independent contractor and shall have no
authority to act for or represent the Fund in any way or otherwise be deemed
an agent of the Fund.
13. During the term of this Agreement, the Fund agrees to furnish
the Manager at its principal office all prospectuses, proxy statements,
reports to shareholders, sales literature, or other material prepared for
distribution to shareholders of the Fund or the public, which refer in any
way to the Manager, prior to use thereof and not to use such material if the
Manager reasonably objects in writing within five business days (or such
other time as may be mutually agreed) after receipt thereof. In the event of
termination of
10
<PAGE>
this Agreement, the Fund will continue to furnish to the Manager copies of any
of the above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery. The Fund shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Fund as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of the 1940
Act.
15. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Manager at Gateway Center Three, 100 Mulberry
Street, Newark, NJ 07102-4077, Attention: Secretary; or (2) to the Fund at One
Seaport Plaza, New York, N.Y. 10292, Attention: President.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
17. The Fund may use the name "Prudential Emerging Growth Fund, Inc."
or any name including the word "Prudential" only for so long as this Agreement
or any extension, renewal or amendment hereof remains in effect, including any
similar agreement with any organization which shall have succeeded to the
Manager's business as Manager or any extension, renewal or amendment thereof
remain in effect. At such time as such an agreement shall no longer be in
effect, the Fund will (to the extent that it
11
<PAGE>
lawfully can) cease to use such a name or any other name indicating that it is
advised by, managed by or otherwise connected with the Manager, or any
organization which shall have so succeeded to such businesses. In no event shall
the Fund use the name "Prudential Emerging Growth Fund, Inc." or any name
including the word "Prudential" if the Manager's function is transferred or
assigned to a company of which The Prudential Insurance Company of America does
not have control.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL EMERGING GROWTH FUND, INC.
By /s/ Richard A. Redeker
---------------------------
Richard A. Redeker
President
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC
By /s/ Brian M. Storms
---------------------------
Brian M. Storms
President and Chief Executive Officer
12
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
SUBADVISORY AGREEMENT
Agreement made as of this 12th day of October, 1996 between Prudential
Mutual Fund Management LLC, a New York limited liability company (PMF or the
Manager), and The Prudential Investment Corporation, a New Jersey Corporation
(the Subadviser).
WHEREAS, the Manager has entered into a Management Agreement, dated
October 12, 1996 (the Management Agreement), with Prudential Emerging Growth
Fund, Inc. (the Fund), a Maryland corporation and a diversified open-end
management investment company registered under the Investment Company Act of
1940 (the 1940 Act), pursuant to which PMF will act as Manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1 (a) Subject to the supervision of the Manager and of the Board of
Directors of the Fund, the Subadviser shall manage the investment
operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance
with the Fund's investment objectives, policies and restrictions as stated
in the Prospectus, (such Prospectus and Statement of Additional Information
as currently in effect and as amended or supplemented from time to time,
being herein called the "Prospectus"), and subject to the following
understandings:
(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the Fund,
and what portion of the assets will be invested or held uninvested as
cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus of the Fund and with the
instructions and directions of the Manager and of the Board of
Directors of the Fund and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986 and
all other applicable federal and state laws and regulations.
<PAGE>
(iii) The Subadviser shall determine the securities and futures
contracts to be purchased or sold by the Fund and will place orders
with or through such persons, brokers, dealers or futures commission
merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set
forth in the Fund's Registration Statement and Prospectus or as the
Board of Directors may direct from time to time. In providing the Fund
with investment supervision, it is recognized that the Subadviser will
give primary consideration to securing the most favorable price and
efficient execution. Within the framework of this policy, the
Subadviser may consider the financial responsibility, research and
investment information and other services provided by brokers, dealers
or futures commission merchants who may effect or be a party to any
such transaction or other transactions to which the Subadviser's other
clients may be a party. It is understood that Prudential Securities
Incorporated may be used as principal broker for securities
transactions but that no formula has been adopted for allocation of
the Fund's investment transaction business. It is also understood that
it is desirable for the Fund that the Subadviser have access to
supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may
execute brokerage transactions at a higher cost to the Fund than may
result when allocating brokerage to other brokers on the basis of
seeking the most favorable price and efficient execution. Therefore,
the Subadviser is authorized to place orders for the purchase and sale
of securities and futures contracts for the Fund with such brokers or
futures commission merchants, subject to review by the Fund's Board of
Directors from time to time with respect to the extent and
continuation of this practice. It is understood that the services
provided by such brokers or futures commission merchants may be useful
to the Subadviser in connection with the Subadviser's services to
other clients.
On occasions when the Subadviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Fund as
well as other clients of the Subadviser, the Subadviser, to the extent
permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities or futures contracts to be
sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be
made by the Subadviser in the manner the Subadviser considers to be
the most equitable and consistent with its fiduciary obligations to
the Fund and to such other clients.
2
<PAGE>
(iv) The Subadviser shall maintain all books and records with
respect to the Fund's portfolio transactions required by subparagraphs
(b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1
under the 1940 Act and shall render to the Fund's Board of Directors
such periodic and special reports as the Directors may reasonably
request.
(v) The Subadviser shall provide the Fund's Custodian on each
business day with information relating to all transactions concerning
the Fund's assets and shall provide the Manager with such information
upon request of the Manager.
(vi) The investment management services provided by the
Subadviser hereunder are not to be deemed exclusive, and the
Subadviser shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the
Fund to serve in the capacities in which they are elected. Services to be
furnished by the Subadviser under this Agreement may be furnished through
the medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall
timely furnish to the Manager all information relating to the Subadviser's
services hereunder needed by the Manager to keep the other books and
records of the Fund required by Rule 3la-1 under the 1940 Act. The
Subadviser agrees that all records which it maintains for the Fund are the
property of the Fund and the Subadviser will surrender promptly to the Fund
any of such records upon the Fund's request, provided however that the
Subadviser may retain a copy of such records. The Subadviser further agrees
to preserve for the periods prescribed by Rule 31a-2 of the Commission
under the 1940 Act any such records as are required to be maintained by it
pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services to
be provided to the Fund pursuant to the Management Agreement and shall
oversee and review the Subadviser's performance of its duties under this
Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to
the Manager in furnishing the services described in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or for
any loss suffered by the Fund or the Manager in connection with the matters
to which this
3
<PAGE>
Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Subadviser's part in the performance of
its duties or from its reckless disregard of its obligations and duties
under this Agreement.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940
Act; provided, however, that this Agreement may be terminated by the Fund
at any time, without the payment of any penalty, by the Board of Directors
of the Fund or by vote of a majority of the outstanding voting securities
(as defined in the 1940 Act) of the Fund, or by the Manager or the
Subadviser at any time, without the payment of any penalty, on not more
than 60 days' nor less than 30 days' written notice to the other party.
This Agreement shall terminate automatically in the event of its assignment
(as defined in the 1940 Act) or upon the termination of the Management
Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees who may also be a
director, officer or employee of the Fund to engage in any other business
or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature,
nor limit or restrict the Subadviser's right to engage in any other
business or to render services of any kind to any other corporation, firm,
individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements,
reports to stockholders, sales literature or other material prepared for
distribution to stockholders of the Fund or the public, which refer to the
Subadviser in any way, prior to use thereof and not to use material if the
Subadviser reasonably objects in writing five business days (or such other
time as may be mutually agreed) after receipt thereof. Sales literature may
be furnished to the Subadviser hereunder by first-class or overnight mail,
facsimile transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Fund must be obtained in conformity with the requirements of the 1940
Act.
9. This Agreement shall be governed by the laws of the State of New York.
4
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC
By /s/ Brian M. Storms
---------------------------
Brian M. Storms
President and Chief Executive Officer
THE PRUDENTIAL INVESTMENT CORPORATION
By /s/ Mendel A. Melzer
---------------------------
Mendel A. Melzer
5
<PAGE>
Prudential Emerging Growth Fund, Inc.
--------------------------------
DISTRIBUTION AGREEMENT
Agreement made as of June 1, 1998, between Prudential Emerging
Growth Fund, Inc. (the Fund), and Prudential Investment Management Services
LLC, a Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the Investment Company Act), as a diversified,
open-end, management investment company and it is in the interest of the Fund
to offer its shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes
and/or series (all such shares being referred to herein as Shares) and the
Fund currently is authorized to offer Class A, Class B, Class C and Class Z
Shares;
WHEREAS, the Distributor is a broker-dealer registered under
the Securities Exchange Act of 1934, as amended, and is engaged in the
business of selling shares of registered investment companies either directly
or through other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other, with respect to the continuous offering of the
Fund's Shares from and after the date hereof in order to promote the growth
of the Fund and facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of
distribution pursuant to Rule 12b-1 under the Investment Company Act with
respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares to the
public on behalf of the Fund and the Distributor hereby accepts such
appointment and agrees to act hereunder.
<PAGE>
The Fund hereby agrees during the term of this Agreement to sell Shares of
the Fund through the Distributor on the terms and conditions set forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
Except with respect to a period of time (not to exceed 60
days) during which the Distributor and Prudential Securities Incorporated
will serve as co-distributors of the Fund in the transition of distribution
services from Prudential Securities Incorporated to the Distributor, the
Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the Fund's Shares, provided that:
2.1 The exclusive rights granted to the Distributor to sell
Shares of the Fund shall not apply to Shares of the Fund issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding shares of any such
company by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions
or through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term
"Prospectus" shall mean the Prospectus and Statement of Additional
Information included as part of the Fund's Registration Statement, as such
Prospectus and Statement of Additional Information may be amended or
supplemented from time to time, and the term "Registration Statement" shall
mean the Registration Statement filed by the Fund with the Securities and
Exchange Commission and effective under the Securities Act of 1933, as
amended (Securities Act), and the Investment Company Act, as such
Registration Statement is amended from time to time.
Section 3. PURCHASE OF SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund
on behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of
the Fund and
<PAGE>
delivered by the Distributor or selected dealers, as described in Section 6.4
hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any
or all classes and/or series of its Shares at times when redemption is
suspended pursuant to the conditions in Section 4.3 hereof or at such other
times as may be determined by the Board. The Fund shall also have the right
to suspend the sale of any or all classes and/or series of its Shares if a
banking moratorium shall have been declared by federal or New Jersey
authorities.
3.4 The Fund, or any agent of the Fund designated in writing
by the Fund, shall be promptly advised of all purchase orders for Shares
received by the Distributor. Any order may be rejected by the Fund;
provided, however, that the Fund will not arbitrarily or without reasonable
cause refuse to accept or confirm orders for the purchase of Shares. The
Fund (or its agent) will confirm orders upon their receipt, will make
appropriate book entries and upon receipt by the Fund (or its agent) of
payment therefor, will deliver deposit receipts for such Shares pursuant to
the instructions of the Distributor. Payment shall be made to the Fund in
New York Clearing House funds or federal funds. The Distributor agrees to
cause such payment and such instructions to be delivered promptly to the Fund
(or its agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND
4.1 Any of the outstanding Shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the
Shares so tendered in accordance with its Declaration of Trust as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Shares shall be
equal to the net asset value determined as set forth in the Prospectus. All
payments by the Fund hereunder shall be made in the manner set forth in
Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption
price as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh day subsequent to its having received
the notice of redemption in proper form. The proceeds of any redemption of
Shares shall be paid by the Fund as follows: (i) in the case of Shares
subject to a contingent deferred sales charge, any applicable contingent
deferred sales charge shall be paid to the Distributor, and the balance shall
be paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus; and (ii) in the case
of all other Shares, proceeds shall be paid to or for the account of the
redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus.
4.3 Redemption of any class and/or series of Shares or
payment may be suspended at times when the New York Stock Exchange is closed
for other than
3
<PAGE>
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange Commission, by
order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Shares
as provided herein, the Fund agrees to sell its Shares so long as it has
Shares of the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of
all financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor such number of
copies of its Prospectus and annual and interim reports as the Distributor
shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to
the necessary approval of the Board and the shareholders, all necessary
action to fix the number of authorized Shares and such steps as may be
necessary to register the same under the Securities Act, to the end that
there will be available for sale such number of Shares as the Distributor
reasonably may expect to sell. The Fund agrees to file from time to time
such amendments, reports and other documents as may be necessary in order
that there will be no untrue statement of a material fact in the Registration
Statement, or necessary in order that there will be no omission to state a
material fact in the Registration Statement which omission would make the
statements therein misleading.
5.4 The Fund shall use its best efforts to notify such states
as the Distributor and the Fund may approve of its intention to sell any
appropriate number of its Shares; provided that the Fund shall not be
required to amend its Articles of Incorporation or By-Laws to comply with the
laws of any state, to maintain an office in any state, to change the terms of
the offering of its Shares in any state from the terms set forth in its
Registration Statement, to qualify as a foreign corporation in any state or
to consent to service of process in any state other than with respect to
claims arising out of the offering of its Shares. Any such notification may
be withheld, terminated or withdrawn by the Fund at any time in its
discretion. As provided in Section 9 hereof, the expense of notification and
maintenance of notification shall be borne by the Fund. The Distributor
shall furnish such information and other material relating to its affairs and
activities as may be required by the Fund in connection with
4
<PAGE>
such notifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort
to effect sales of Shares, but shall not be obligated to sell any specific
number of Shares. Sales of the Shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers
as set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal
and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer nor any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus and any sales
literature approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with
the requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into
selected dealer agreements with registered and qualified securities dealers
and other financial institutions of its choice for the sale of Shares,
provided that the Fund shall approve the forms of such agreements. Within
the United States, the Distributor shall offer and sell Shares only to such
selected dealers as are members in good standing of the NASD or are
institutions exempt from registration under applicable federal securities
laws. Shares sold to selected dealers shall be for resale by such dealers
only at the offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
7.1 With respect to classes and/or series of Shares which
impose a front-end sales charge, the Distributor shall receive and may retain
any portion of any front-end sales charge which is imposed on such sales and
not reallocated to selected dealers as set forth in the Prospectus, subject
to the limitations of Rule 2830 of the Conduct Rules of the NASD. Payment of
these amounts to the Distributor is not contingent upon the adoption or
continuation of any applicable Plans.
7.2 With respect to classes and/or series of Shares which
impose a contingent deferred sales charge, the Distributor shall receive and
may retain any
5
<PAGE>
contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct
Rules of the NASD. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a
distribution and service fee with respect to the Fund's classes and/or series
of Shares as described in each of the Fund's respective Plans and this
Agreement.
8.2 So long as a Plan or any amendment thereto is in effect,
the Distributor shall inform the Board of the commissions and account
servicing fees with respect to the relevant class and/or series of Shares to
be paid by the Distributor to account executives of the Distributor and to
broker-dealers, financial institutions and investment advisers which have
dealer agreements with the Distributor. So long as a Plan (or any amendment
thereto) is in effect, at the request of the Board or any agent or
representative of the Fund, the Distributor shall provide such additional
information as may reasonably be requested concerning the activities of the
Distributor hereunder and the costs incurred in performing such activities
with respect to the relevant class and/or series of Shares.
Section 9. ALLOCATION OF EXPENSES
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements
thereto, and preparing and mailing annual and periodic reports and proxy
materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of making notice filings for the Shares for sale, and, if necessary
or advisable in connection therewith, of qualifying the Fund as a broker or
dealer, in such states of the United States or other jurisdictions as shall
be selected by the Fund and the Distributor pursuant to Section 5.4 hereof
and the cost and expense payable to each such state for continuing
notification therein until the Fund decides to discontinue such notification
pursuant to Section 5.4 hereof. As set forth in Section 8 above, the Fund
shall also bear the expenses it assumes pursuant to any Plan, so long as such
Plan is in effect.
6
<PAGE>
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the
Distributor, its officers and directors and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims,
demands or liabilities and any reasonable counsel fees incurred in connection
therewith) which the Distributor, its officers, members or any such
controlling person may incur under the Securities Act, or under common law or
otherwise, arising out of or based upon any untrue statement of a material
fact contained in the Registration Statement or Prospectus or arising out of
or based upon any alleged omission to state a material fact required to be
stated in either thereof or necessary to make the statements in either
thereof not misleading, except insofar as such claims, demands, liabilities
or expenses arise out of or are based upon any such untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with information furnished by the Distributor to the Fund for use
in the Registration Statement or Prospectus; provided, however, that this
indemnity agreement shall not inure to the benefit of any such officer,
member or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be
indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable
by reason of disabling conduct, by (a) a vote of a majority of a quorum of
Directors or Directors who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Investment Company Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. The
Fund's agreement to indemnify the Distributor, its officers and members and
any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or members, or any such controlling person, such notification to
be given by letter or telegram addressed to the Fund at its principal
business office. The Fund agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the
Fund, its officers and Directors and any person who controls the Fund, if
any, within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending against such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which the Fund, its officers
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and Directors or any such controlling person may incur under the Securities
Act or under common law or otherwise, but only to the extent that such
liability or expense incurred by the Fund, its Directors or officers or such
controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon
any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus
or necessary to make such information not misleading. The Distributor's
agreement to indemnify the Fund, its officers and Directors and any such
controlling person as aforesaid, is expressly conditioned upon the
Distributor's being promptly notified of any action brought against the Fund,
its officers and Directors or any such controlling person, such notification
being given to the Distributor at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date
first above written and shall remain in force for two years from the date
hereof and thereafter, but only so long as such continuance is specifically
approved at least annually by (a) the Board of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of those Directors who
are not parties to this Agreement or interested persons of any such parties
and who have no direct or indirect financial interest in this Agreement or in
the operation of any of the Fund's Plans or in any agreement related thereto
(Independent Directors), cast in person at a meeting called for the purpose
of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent Directors or by vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, or by the Distributor, on sixty (60) days' written
notice to the other party. This Agreement shall automatically terminate in
the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when
used in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such
amendment
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is specifically approved by (a) the Board of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of the independent
Directors cast in person at a meeting called for the purpose of
voting on such amendment.
Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES
The amendment or termination of this Agreement with respect to
any class and/or series shall not result in the amendment or termination of
this Agreement with respect to any other class and/or series unless
explicitly so provided.
Section 14. GOVERNING LAW
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New Jersey as at the
time in effect and the applicable provisions of the Investment Company Act.
To the extent that the applicable law of the State of New Jersey, or any of
the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
Prudential Investment Management Services LLC
By: /s/ Brian M. Storms
------------------------
Brian M. Storms
Prudential Emerging Growth Fund, Inc.
-------------------------------------
By: /s/ Robert F. Gunia
------------------------
Robert F. Gunia
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DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as
they may exist from time to time) comprising the Prudential Mutual Fund
Family (each a "Fund" and collectively the "Funds") and any classes thereof
for which Distributor now or in the future serves as principal underwriter
and distributor, subject to the terms of this Dealer Agreement ("Agreement").
Any such additional Funds will be included in this Agreement upon
Distributor's written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a
broker-dealer registered with the Securities and Exchange Commission ("SEC");
(ii) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"); and (iii) licensed by the appropriate regulatory
agency of each state or other jurisdiction in which Dealer will offer and
sell Shares of the Funds, to the extent necessary to perform the duties and
activities contemplated by this Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer
with respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership
with the NASD; or (iii) termination or suspension of its license to do
business by any state or other jurisdiction or federal regulatory agency
shall immediately cause the termination of this Agreement. Dealer further
agrees to immediately notify Distributor in writing of any such action or
event.
d. Dealer agrees that this Agreement is in all respects
subject to the Conduct Rules of the NASD and such Conduct Rules shall control
any provision to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all
applicable state and federal laws and all rules and regulations promulgated
thereunder generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds
(including those of each of its classes) only at the regular public offering
price applicable to such Shares and in effect at the time of each
transaction. The procedures relating to all orders and the handling of each
order (including the manner of computing the net asset value of Shares and
the effective time of orders received from Dealer) are subject to: (i) the
terms of the then current prospectus and statement of
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additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii)
the new account application for each Fund, as supplemented or amended from
time to time; and (iii) Distributor's written instructions and multiple
class pricing procedures and guidelines, as provided to Dealer from time to
time. To the extent that the Prospectus contains provisions that are
inconsistent with this Agreement or any other document, the terms of the
Prospectus shall be controlling.
b. Distributor reserves the right at any time, and without
notice to Dealer, to suspend the sale of Shares or to withdraw or limit the
offering of Shares. Distributor reserves the unqualified right not to accept
any specific order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public,
Dealer is not authorized to act as broker or agent for, or employee of,
Distributor, any Fund or any other dealer, and Dealer shall not in any manner
represent to any third party that Dealer has such authority or is acting in
such capacity. Rather, Dealer agrees that it is acting as principal for
Dealer's own account or as agent on behalf of Dealer's customers in all
transactions in Shares, except as provided in Section 3.i. hereof. Dealer
acknowledges that it is solely responsible for all suitability determinations
with respect to sales of Shares of the Funds to Dealer's customers and that
Distributor has no responsibility for the manner of Dealer's performance of,
or for Dealer's acts or omissions in connection with, the duties and
activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its
sole discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders
placed through a remote terminal or otherwise electronically transmitted via
the National Securities Clearing Corporation ("NSCC") Fund/Serv Networking
program, provided, however, that appropriate documentation thereof and
agreements relating thereto are executed by both parties to this Agreement,
including in particular the standard NSCC Networking Agreement and any other
related agreements between Distributor and Dealer deemed appropriate by
Distributor, and that all accounts opened or maintained pursuant to that
program will be governed by applicable NSCC rules and procedures. Both
parties further agree that, if the NSCC Fund/Serv Networking program is used
to place orders, the standard NSCC Networking Agreement will control insofar
as there is any conflict between any provision of the Dealer Agreement and
the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or
from Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares
only from Distributor and only for the purpose of covering purchase orders
Dealer has already received from its customers or for Dealer's own bona fide
investment.
c. Dealer agrees to date and time stamp all orders received
by Dealer and promptly, upon receipt of any and all orders, to transmit to
Distributor all orders received prior to
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the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price
next determined after receipt by Dealer, in accordance with the Prospectus.
Dealer agrees not to withhold placing orders for Shares with Distributor so
as to profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and
sales of Shares made through Dealer and to furnish Distributor or regulatory
authorities with copies of such records upon request. In that regard, Dealer
agrees that, unless Dealer holds Shares as nominee for its customers or
participates in the NSCC Fund/Serv Networking program, at certain matrix
levels, it will provide Distributor with all necessary information to comply
properly with all federal, state and local reporting requirements and backup
and nonresident alien withholding requirements for its customer accounts
including, without limitation, those requirements that apply by treating
Shares issued by the Funds as readily tradable instruments. Dealer
represents and agrees that all Taxpayer Identification Numbers ("TINs")
provided are certified, and that no account that requires a certified TIN
will be established without such certified TIN. With respect to all other
accounts, including Shares held by Dealer in omnibus accounts and Shares
purchased or sold through the NSCC Fund/Serv Networking program, at certain
matrix levels, Dealer agrees to perform all federal, state and local tax
reporting with respect to such accounts, including without limitation
redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to
its customers Prospectuses, proxy solicitation materials and related
information and proxy cards, semi-annual and annual shareholder reports and
any other materials in compliance with applicable legal requirements, except
to the extent that Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund
or is tendered for redemption within seven (7) business days after
confirmation by Distributor of the original purchase order from Dealer,
Dealer shall forfeit its right to any concession or commission received by
Dealer with respect to such Share and shall forthwith refund to Distributor
the full concession allowed to Dealer or commission paid to Dealer on the
original sale. Distributor agrees to notify Dealer of such repurchase or
redemption within a reasonable time after settlement. Termination or
cancellation of this Agreement shall not relieve Dealer from its obligation
under this provision.
g. Dealer agrees that payment for Shares ordered from
Distributor shall be in Fed Funds, New York clearinghouse or other
immediately available funds and that such funds shall be received by
Distributor by the earlier of: (i) the end of the third (3rd) business day
following Dealer's receipt of the customer's order to purchase such Shares;
or (ii) the settlement date established in accordance with Rule 15c6-1 under
the Securities Exchange Act of 1934, as amended. If such payment is not
received by Distributor by such date, Dealer shall forfeit its right to any
concession or commission with respect to such order, and Distributor reserves
the right, without notice, forthwith to cancel the sale, or, at its option,
to sell the Shares ordered back to the Fund, in which case Distributor may
hold Dealer responsible for any loss, including loss of profit, suffered by
Distributor resulting from Dealer's failure to make payment as aforesaid. If
a purchase is made by check, the purchase is deemed made upon conversion of
the purchase instrument into Fed Funds, New York clearinghouse or other
immediately available funds.
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h. Dealer agrees that it: (i) shall assume responsibility for
any loss to the Fund caused by a correction to any order placed by Dealer
that is made subsequent to the trade date for the order, provided such order
correction was not based on any negligence on Distributor's part; and (ii)
will immediately pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the
purchase of Shares on behalf of any IRAs, 401(k) plans or other retirement
plan accounts, by mail, telephone, or wire, Dealer shall act as agent for the
custodian or trustee of such plans (solely with respect to the time of
receipt of the application and payments), and Dealer shall not place such an
order with Distributor until it has received from its customer payment for
such purchase and, if such purchase represents the first contribution to such
a retirement plan account, the completed documents necessary to establish the
retirement plan. Dealer agrees to indemnify Distributor and its affiliates
for any claim, loss, or liability resulting from incorrect investment
instructions received by Distributor from Dealer.
j. Dealer agrees that it will not make any conditional orders
for the purchase or redemption of Shares and acknowledges that Distributor
will not accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by
it in connection with its activities under this Agreement will be borne by
Dealer.
l. Dealer agrees that it will keep in force appropriate
broker's blanket bond insurance policies covering any and all acts of
Dealer's partners, directors, officers, employees, and agents adequate to
reasonably protect and indemnify the Distributor and the Funds against any
loss which any party may suffer or incur, directly or indirectly, as a result
of any action by Dealer or Dealer's partners, directors, officers, employees,
and agents.
m. Dealer agrees that it will maintain the required net
capital as specified by the rules and regulations of the SEC, NASD and other
regulatory authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the
total sales charges and dealer concessions or commissions, if any, payable to
Dealer shall be as stated on Schedule A to this Agreement, which may be
amended by Distributor from time to time. Distributor reserves the right,
without prior notice, to suspend or eliminate such dealer concession or
commissions by amendment, sticker or supplement to the then current
Prospectus for each Fund. Such sales charges and dealer concessions or
commissions, are subject to reduction under a variety of circumstances as
described in each Fund's then current Prospectus. For an investor to obtain
any reduction, Distributor must be notified at the time of the sale that the
sale qualifies for the reduced sales charge. If Dealer fails to notify
Distributor of the applicability of a reduction in the sales charge at the
time the trade is placed, neither Distributor nor any Fund will be liable for
amounts necessary to reimburse any investor for the reduction that should
have been effected. Dealer acknowledges that no sales charge or concession
or commission will be paid to Dealer on the reinvestment of dividends or
capital gains reinvestment or on Shares acquired in exchange for Shares of
another Fund, or class thereof, having the same sales charge structure as the
Fund, or class thereof, from which the exchange was made, in accordance with
the Prospectus.
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b. In accordance with the Funds' Prospectuses, Distributor or
any affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made
at net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares
purchased in a Qualifying Sale are redeemed within twelve (12) months of the
end of the month of purchase, Distributor shall be entitled to recover any
advance payment attributable to the redeemed Shares by reducing any account
payable or other monetary obligation Distributor may owe to Dealer or by
making demand upon Dealer for repayment in cash. Distributor reserves the
right to withhold advances to Dealer, if for any reason Distributor believes
that it may not be able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to
Shares of any such Fund, to the extent that Dealer provides distribution,
marketing, administrative and other services and activities regarding the
promotion of such Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or
service fees under Rule 12b-1 Plans applicable to Shares purchased by
Dealer's customers, Distributor directs Dealer to provide enhanced
shareholder services such as: processing purchase and redemption
transactions; establishing shareholder accounts; and providing certain
information and assistance with respect to the Funds. (Redemption levels of
shareholder accounts assigned to Dealer will be considered in evaluating
Dealer's continued ability to receive payments of distribution and/or service
fees.) In addition, Dealer agrees to support Distributor's marketing efforts
by, among other things, granting reasonable requests for visits to Dealer's
office by Distributor's wholesalers and marketing representatives, including
all Funds covered by a Rule 12b-1 Plan on Dealer's "approved," "preferred" or
other similar product lists, if applicable, and otherwise providing
satisfactory product, marketing and sales support. Further, Dealer agrees to
provide Distributor with supporting documentation concerning the shareholder
services provided, as Distributor may reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees
shall be based on the value of Shares attributable to Dealer's customers and
eligible for such payment, and shall be calculated on the basis of and at the
rates set forth in the compensation schedule then in effect. Without prior
approval by a majority of the outstanding shares of a Fund, the aggregate
annual fees paid to Dealer pursuant to any Rule 12b-1 Plan shall not exceed
the amounts stated as the "annual maximums" in each Fund's Prospectus, which
amount shall be a specified percent of the value of the Fund's net assets
held in Dealer's customers' accounts that are eligible for payment pursuant
to the Rule 12b-1 Plans (determined in the same manner as each Fund uses to
compute its net assets as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds
and the Distributor shall control over this Agreement in the event of any
inconsistency. Each Rule 12b-1 Plan in effect on the date of this Agreement
is described in the relevant Fund's Prospectus. Dealer
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hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or
discontinued at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions
whereby the Fund, under all ordinary circumstances, will redeem Shares held
by shareholders on demand. Dealer agrees that it will not make any
representations to shareholders relating to the redemption of their Shares
other than the statements contained in the Prospectus and the underlying
organizational documents of the Fund, to which it refers, and that Dealer
will pay as redemption proceeds to shareholders the net asset value, minus
any applicable deferred sales charge or redemption fee, determined after
receipt of the order as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its
customers at a price below that next quoted by the Fund for redemption or
repurchase, I.E., at the net asset value of such Shares, less any applicable
deferred sales charge, or redemption fee, in accordance with the Fund's
Prospectus. Dealer shall, however, be permitted to sell Shares for the
account of the customer or record owner to the Funds at the repurchase price
then currently in effect for such Shares and may charge the customer or
record owner a fair service fee or commission for handling the transaction,
provided Dealer discloses the fee or commission to the customer or record
owner. Nevertheless, Dealer agrees that it shall not under any circumstances
maintain a secondary market in such repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it
has made, if instructions in proper form, including any outstanding
certificates, are not received by Distributor within the time customary or
the time required by law, the redemption may be canceled forthwith without
any responsibility or liability on Distributor's part or on the part of any
Fund, or Distributor, at its option, may buy the shares redeemed on behalf of
the Fund, in which latter case Distributor may hold Dealer responsible for
any loss, including loss of profit, suffered by Distributor resulting from
Distributor's failure to settle the redemption.
d. Dealer agrees that it will comply with any restrictions
and limitations on exchanges described in each Fund's Prospectus, including
any restrictions or prohibitions relating to frequent purchases and
redemptions (i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with written
guidelines or standards relating to the sale or distribution of Funds
offering multiple classes of Shares with different sales charges and
distribution-related operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners,
directors, officers, employees, and agents is authorized to give any
information or make any representations concerning Shares of any Fund except
those contained in the Fund's then current Prospectus or in materials
provided by Distributor.
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b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only
advertising or sales material relating to the Funds that: (i) is supplied by
Distributor, or (ii) conforms to the requirements of all applicable laws or
regulations of any government or authorized agency having jurisdiction over
the offering or sale of Shares of the Funds and is approved in writing by
Distributor in advance of its use. Such approval may be withdrawn by
Distributor in whole or in part upon written notice to Dealer, and Dealer
shall, upon receipt of such notice, immediately discontinue the use of such
sales literature, sales bulletins and advertising. Dealer is not authorized
to modify or translate any such materials without Distributor's prior written
consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and
Distributor shall have no obligation or responsibility with respect to
Dealer's right to purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with
information identifying the states or jurisdictions in which it is believed
that all necessary notice, registration or exemptive filings for Shares have
been made under applicable securities laws such that offers and sales of
Shares may be made in such states or jurisdictions. Distributor shall have
no obligation to make such notice, registration or exemptive filings with
respect to Shares in any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states
or jurisdictions in which it has been informed that Shares may not be sold or
in which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws
regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or
Dealer's personnel selling Fund Shares. Distributor shall not, in any event,
be liable or responsible for the issue, form, validity, enforceability and
value of such Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of
Shares in any foreign jurisdiction, except with the express written consent
of Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless
Distributor and the Funds and their predecessors, successors, and affiliates,
each current or former partner, officer, director, employee, shareholder or
agent and each person who controls or is controlled by Distributor from any
and all losses, claims, liabilities, costs, and expenses, including attorney
fees, that may be assessed against or suffered or incurred by any of them
howsoever they arise, and as they are incurred, which relate in any way to:
(i) any alleged violation of any statute or regulation (including without
limitation the securities laws and regulations of the United States or any
state or foreign country) or any alleged tort or breach of contract, related
to the offer or sale by Dealer of Shares of the Funds pursuant to this
Agreement (except to the extent that Distributor's negligence or failure to
follow correct instructions received from Dealer is the cause of such loss,
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claim, liability, cost or expense); (ii) any redemption or exchange pursuant
to instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer
or its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless
Dealer and its predecessors, successors and affiliates, each current or
former partner, officer, director, employee or agent, and each person who
controls or is controlled by Dealer from any and all losses, claims,
liabilities, costs and expenses, including attorney fees, that may be
assessed against or suffered or incurred by any of them which arise, and
which relate to any untrue statement of or omission to state a material fact
contained in the Prospectus or any written sales literature or other
marketing materials provided by the Distributor to the Dealer, required to be
stated therein or necessary to make the statements therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable
time, of any claim or complaint or any enforcement action or other proceeding
with respect to Shares offered hereunder against Dealer or its partners,
affiliates, officers, directors, employees or agents, or any person who
controls Dealer, within the meaning of Section 15 of the Securities Act of
1933, as amended.
d. Dealer further agrees promptly to send Distributor copies
of (i) any report filed pursuant to NASD Conduct Rule 3070, including,
without limitation quarterly reports filed pursuant to Rule 3070(c), (ii)
reports filed with any other self-regulatory organization in lieu of Rule
3070 reports pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form
BD.
e. Each party's obligations under these indemnification
provisions shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to
this Agreement may terminate this Agreement immediately by giving written
notice to the other party of that other party's material breach of this
Agreement. Such notice shall be deemed to have been given and to be
effective on the date on which it was either delivered personally to the
other party or any officer or member thereof, or was mailed postpaid or
delivered to a telegraph office for transmission to the other party's
designated person at the addresses shown herein or in the most recent NASD
Manual.
b. This Agreement shall terminate immediately upon the
appointment of a Trustee under the Securities Investor Protection Act or any
other act of insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing
means shall have no effect upon transactions entered into prior to the
effective date of termination and shall
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not relieve Dealer of its obligations, duties and indemnities specified in
this Agreement. A trade placed by Dealer subsequent to its voluntary
termination of this Agreement will not serve to reinstate the Agreement.
Reinstatement, except in the case of a temporary suspension of Dealer, will
only be effective upon written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of
its duties under this Agreement to any entity that controls or is under
common control with Distributor.
e. This Agreement may be amended by Distributor at any time
by written notice to Dealer. Dealer's placing of an order or accepting
payment of any kind after the effective date and receipt of notice of such
amendment shall constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and
existing and in good standing under the laws of the state of Delaware and is
duly registered or exempt from registration as a broker-dealer in all states
and jurisdictions in which it provides services as principal underwriter and
distributor for the Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's
charter and by-laws to enter into this Agreement and perform all activities
and services of the Distributor provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Distributor's ability to perform under
this Agreement.
d. All requisite actions have been taken to authorize
Distributor to enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found
elsewhere in this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing
under the laws of the state, commonwealth or other jurisdiction in which
Dealer is organized and that Dealer will not offer Shares of any Fund for
sale in any state or jurisdiction where such Shares may not be legally sold
or where Dealer is not qualified to act as a broker-dealer.
A-9
<PAGE>
b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all
activities and services of the Dealer provided for herein and that there are
no impediments, prior or existing, regulatory, self-regulatory,
administrative, civil or criminal matters affecting Dealer's ability to
perform under this Agreement.
c. All requisite actions have been taken to authorize Dealer
to enter into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement,
subject to any enforcement or other proceeding with respect to its activities
under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with
Distributor have a debit balance, Distributor shall be permitted to offset
and recover the amount owed from any other account Dealer has with
Distributor, without notice or demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the
NASD. The parties agree that, to the extent permitted under such arbitration
rules and procedures, the arbitrators selected shall be from the securities
industry. Judgment upon any arbitration award may be entered by any state or
federal court having jurisdiction.
c. This Agreement shall be governed and construed in
accordance with the laws of the state of New Jersey, not including any
provision which would require the general application of the law of another
jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only,
are not a party hereof, and are not to be used in construing or interpreting
any aspect hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the parties
hereto with respect to the subject matter contained herein and supersedes all
previous agreements. This Agreement shall be binding upon the parties hereto
when signed by Dealer and accepted by Distributor.
A-10
<PAGE>
17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to
be invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties
hereto with respect to the subject matter contained herein and supersedes all
previous agreements and/or understandings of the parties. This Agreement
shall be binding upon the parties hereto when signed by Dealer and accepted
by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
DEALER:
---------------------------------
By:
-----------------------------------
(Signature)
Name:
----------------------------------
Title:
----------------------------------
Address:
-------------------------------
-------------------------------
-------------------------------
Telephone:
-----------------------------
NASD CRD #
-----------------------------
Prudential Dealer #
--------------------
(Internal Use Only)
Date:
-----------------------------------
<PAGE>
Prudential Emerging Growth Fund, Inc.
-----------------------------------------
Amended and Restated
Distribution and Service Plan
(CLASS A SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Emerging Growth Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor,
as compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority of those Directors/Trustees who are not "interested persons" of the
Fund (as defined in the Investment Company Act) and who have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors/Trustees), have determined by votes cast
in person at a meeting called for the purpose of voting on this Plan that there
is a reasonable likelihood that adoption and continuation of this Plan will
benefit the Fund and its shareholders. Expenditures under this Plan by the Fund
for Distribution Activities (defined below) are primarily
1
<PAGE>
intended to result in the sale of Class A shares of the Fund within the
meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors/Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions and trailer commissions paid to, or on account
of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A shares of
the Fund, including sales commissions, trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as the Board shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such
continuance is specifically approved at least annually by a majority of the
Board of Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. AMENDMENTS
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12B-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: October 12, 1996
Amended: June 1, 1998
6
<PAGE>
Prudential Emerging Growth Fund, Inc.
-----------------------------------
Amended and Restated
Distribution and Service Plan
(CLASS B SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Emerging Growth Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest
in the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting
called for the purpose of voting on this Plan that there is a reasonable
likelihood that adoption and continuation of this Plan will benefit the Fund
and its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined below) are primarily intended to result in
the sale of Class B shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors/Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors/Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class B shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class B shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. AMENDMENTS
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12B-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: October 12, 1996
Amended: June 1, 1998
6
<PAGE>
Prudential Emerging Growth Fund, Inc.
-----------------------------------
Amended and Restated
Distribution and Service Plan
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Emerging Growth Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class C shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors/Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors/Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. AMENDMENTS
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12B-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: October 12, 1996
Amended: June 1, 1998
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001022624
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC. (CLASS A)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 113,736,061
<INVESTMENTS-AT-VALUE> 141,513,271
<RECEIVABLES> 1,014,634
<ASSETS-OTHER> 718,301
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 799,100
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 657,493
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107,234,498
<SHARES-COMMON-STOCK> 10,508,656
<SHARES-COMMON-PRIOR> 9,351,123
<ACCUMULATED-NII-CURRENT> (931,936)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,709,841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,777,210
<NET-ASSETS> (19,859,779)
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<INTEREST-INCOME> 86,053
<OTHER-INCOME> 0
<EXPENSES-NET> 1,137,354
<NET-INVESTMENT-INCOME> (931,936)
<REALIZED-GAINS-CURRENT> 8,405,647
<APPREC-INCREASE-CURRENT> 11,480,982
<NET-CHANGE-FROM-OPS> 18,954,693
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (2,221,255)
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<NUMBER-OF-SHARES-REDEEMED> (22,362,207)
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<ACCUMULATED-NII-PRIOR> (401,734)
<ACCUMULATED-GAINS-PRIOR> (6,412,354)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,137,354
<AVERAGE-NET-ASSETS> 33,830,000
<PER-SHARE-NAV-BEGIN> 11.92
<PER-SHARE-NII> (0.06)
<PER-SHARE-GAIN-APPREC> 1.94
<PER-SHARE-DIVIDEND> 0.00
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<PER-SHARE-NAV-END> 13.59
<EXPENSE-RATIO> 1.25
<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> 002
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC. (CLASS B)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 113,736,061
<INVESTMENTS-AT-VALUE> 141,513,271
<RECEIVABLES> 1,014,634
<ASSETS-OTHER> 718,301
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 799,100
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 657,493
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107,234,498
<SHARES-COMMON-STOCK> 10,508,656
<SHARES-COMMON-PRIOR> 9,351,123
<ACCUMULATED-NII-CURRENT> (931,936)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,709,841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,777,210
<NET-ASSETS> (19,859,779)
<DIVIDEND-INCOME> 119,365
<INTEREST-INCOME> 86,053
<OTHER-INCOME> 0
<EXPENSES-NET> 1,137,354
<NET-INVESTMENT-INCOME> (931,936)
<REALIZED-GAINS-CURRENT> 8,405,647
<APPREC-INCREASE-CURRENT> 11,480,982
<NET-CHANGE-FROM-OPS> 18,954,693
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (2,221,255)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,052,668
<NUMBER-OF-SHARES-REDEEMED> (22,362,207)
<SHARES-REINVESTED> 2,134,825
<NET-CHANGE-IN-ASSETS> 19,558,724
<ACCUMULATED-NII-PRIOR> (401,734)
<ACCUMULATED-GAINS-PRIOR> (6,412,354)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,137,354
<AVERAGE-NET-ASSETS> 86,435,000
<PER-SHARE-NAV-BEGIN> 11.85
<PER-SHARE-NII> (0.10)
<PER-SHARE-GAIN-APPREC> 1.91
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.21)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.45
<EXPENSE-RATIO> 2.00
<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> 003
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC. (CLASS C)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 113,736,061
<INVESTMENTS-AT-VALUE> 141,513,271
<RECEIVABLES> 1,014,634
<ASSETS-OTHER> 718,301
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 799,100
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 657,493
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107,234,498
<SHARES-COMMON-STOCK> 10,508,656
<SHARES-COMMON-PRIOR> 9,351,123
<ACCUMULATED-NII-CURRENT> (931,936)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,709,841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,777,210
<NET-ASSETS> (19,859,779)
<DIVIDEND-INCOME> 119,365
<INTEREST-INCOME> 86,053
<OTHER-INCOME> 0
<EXPENSES-NET> 1,137,354
<NET-INVESTMENT-INCOME> (931,936)
<REALIZED-GAINS-CURRENT> 8,405,647
<APPREC-INCREASE-CURRENT> 11,480,982
<NET-CHANGE-FROM-OPS> 18,954,693
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (2,221,255)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,052,668
<NUMBER-OF-SHARES-REDEEMED> (22,362,207)
<SHARES-REINVESTED> 2,134,825
<NET-CHANGE-IN-ASSETS> 19,558,724
<ACCUMULATED-NII-PRIOR> (401,734)
<ACCUMULATED-GAINS-PRIOR> (6,412,354)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,137,354
<AVERAGE-NET-ASSETS> 6,941,000
<PER-SHARE-NAV-BEGIN> 11.85
<PER-SHARE-NII> (0.10)
<PER-SHARE-GAIN-APPREC> 1.92
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.21)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.46
<EXPENSE-RATIO> 2.00
<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> 004
<NAME> PRUDENTIAL EMERGING GROWTH FUND, INC. (CLASS Z)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 113,736,061
<INVESTMENTS-AT-VALUE> 141,513,271
<RECEIVABLES> 1,014,634
<ASSETS-OTHER> 718,301
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 799,100
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 657,493
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107,234,498
<SHARES-COMMON-STOCK> 10,508,656
<SHARES-COMMON-PRIOR> 9,351,123
<ACCUMULATED-NII-CURRENT> (931,936)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,709,841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,777,210
<NET-ASSETS> (19,859,779)
<DIVIDEND-INCOME> 119,365
<INTEREST-INCOME> 86,053
<OTHER-INCOME> 0
<EXPENSES-NET> 1,137,354
<NET-INVESTMENT-INCOME> (931,936)
<REALIZED-GAINS-CURRENT> 8,405,647
<APPREC-INCREASE-CURRENT> 11,480,982
<NET-CHANGE-FROM-OPS> 18,954,693
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (2,221,255)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,052,668
<NUMBER-OF-SHARES-REDEEMED> (22,362,207)
<SHARES-REINVESTED> 2,134,825
<NET-CHANGE-IN-ASSETS> 19,558,724
<ACCUMULATED-NII-PRIOR> (401,734)
<ACCUMULATED-GAINS-PRIOR> (6,412,354)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,137,354
<AVERAGE-NET-ASSETS> 736,000
<PER-SHARE-NAV-BEGIN> 11.93
<PER-SHARE-NII> (0.09)
<PER-SHARE-GAIN-APPREC> 2.01
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.21)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.64
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under
the Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in the Fund. Any
material amendment to this plan is subject to prior approval of the Board of
Directors, including a majority of the independent Directors.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge
and a distribution and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1%
per annum of the average daily net assets of the class. The
initial sales charge is waived or reduced for certain
eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge
but are subject to a high contingent deferred sales charge
(declining from 5% to zero over a six-year period) which
will be imposed on certain redemptions and a Rule 12b-1
fee not to exceed 1% per annum of the average daily net
assets of the class. The contingent deferred sales charge
is waived for certain eligible investors. Class B shares
automatically convert to Class A shares approximately seven
years after purchase.
CLASS C SHARES: Class C shares issued before November 2, 1998 are not
subject to an initial sales charge but are subject to a 1%
contingent deferred sales charge which will be imposed on
certain redemptions within the first 12 month after purchase
and a Rule 12b-1 fee not to exceed 1% per annum of the
average daily net assets of the class. Class C shares
issued on or after November 2, 1998 are subject to a low
initial sales charge and a 1% contingent deferred sales
charge which will be imposed on certain redemptions within
the first 18 months after purchase and a Rule 12b-1 fee not
to exceed 1% per annum of the average daily net assets of
the class.
<PAGE>
CLASS Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge, nor are they subject to
any Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class of the Fund will be allocated to each
class of the Fund on the basis of the net asset value of that class in
relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of shares,
to the extent paid, will be paid on the same day and at the same time,
and will be determined in the same manner and will be in the same amount,
except that the amount of the dividends and other distributions declared
and paid by a particular class of the Fund may be different from that
paid by another class of the Fund because of Rule 12b-1 fees and other
expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund's
current prospectus. Exchange privileges may vary among classes and among
holders of a Class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be
effected at relative net asset value without the imposition of any
additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the
2
<PAGE>
existence of any material conflicts among the interests of
its several classes. The Directors, including a majority of the
independent Directors, shall take such action as is reasonably necessary
to eliminate any such conflicts that may develop. Prudential Investments
Fund Management LLC, the Fund's Manager, will be responsible for reporting
any potential or existing conflicts to the Directors.
C. For purposes of expressing an opinion on the financial statements of [each
Portfolio of] the Fund, the methodology and procedures for calculating the
net asset value and dividends/distributions of the Fund's several classes
and the proper allocation of income and expenses among such classes will be
examined annually by the Fund's independent auditors who, in performing
such examination, shall consider the factors set forth in the relevant
auditing standards adopted, from time to time, by the American Institute of
Certified Public Accountants.
Approved: August 26, 1998
Effective: November 2, 1998
3
