<PAGE>
As filed with the Securities and Exchange Commission on January 20, 2000
Registration No. 333-11785
811-07811
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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. 6 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 7 /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)
/X/ on January 20, 2000 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
<TABLE>
<S> <C>
Title of Securities Being Registered.... Shares of Common Stock, $.001 par value per share
</TABLE>
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<PAGE>
FUND TYPE:
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Stock
INVESTMENT OBJECTIVE:
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Long-term capital appreciation
PRUDENTIAL
EMERGING
GROWTH
FUND, INC.
[LOGO]
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PROSPECTUS: JANUARY 20, 2000
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<S> <C>
As with all mutual funds, the Securities and
Exchange Commission has not approved or
disapproved the Fund's shares, nor has the SEC
determined that this prospectus is complete or
accurate. It is a criminal offense to state
otherwise. [LOGO]
</TABLE>
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objective and Policies
7 Other Investments and Strategies
10 Investment Risks
14 HOW THE FUND IS MANAGED
14 Board of Directors
14 Manager
14 Investment Adviser
14 Portfolio Manager
15 Distributor
16 FUND DISTRIBUTIONS AND TAX ISSUES
16 Distributions
17 Tax Issues
18 If You Sell or Exchange Your Shares
20 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
20 How to Buy Shares
28 How to Sell Your Shares
32 How to Exchange Your Shares
34 FINANCIAL HIGHLIGHTS
34 Class A Shares
35 Class B Shares
36 Class C Shares
37 Class Z Shares
38 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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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 with the potential for above-average growth. We also
may use derivatives for hedging or to improve the Fund's returns.
The Fund may actively and frequently trade its portfolio securities. 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 we invest
primarily in equities, there is the risk that the price of particular equities
we own could go down, or the value of the equity markets or a sector of them
could go down. Stock markets are volatile. Generally, the stock prices of small
and medium-sized companies vary more than the prices 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 Composite
Stock Price Index (S&P 500 Index). In addition, different parts of a market can
react differently to adverse issuer, market, regulatory, political and economic
developments.
Since our objective is long-term capital appreciation, 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.
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WE'RE GROWTH INVESTORS
In deciding which equities to buy, we use what is known as a growth investment
style. This means we invest in companies that we believe could experience
superior sales or earnings growth.
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1
<PAGE>
RISK/RETURN SUMMARY
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The Fund may actively and frequently trade its portfolio securities. High
portfolio turnover results in higher transaction costs and can affect the Fund's
performance and have adverse tax consequences.
Some of our investment strategies--such as using derivatives--also involve
above-average risks. The Fund may use risk management techniques to try to
preserve assets or enhance return. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
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.
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2 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation. The bar chart and table below demonstrate the risk of investing in
the Fund by showing how returns can change from year to year and by showing how
the Fund's average annual total returns compare with a stock index and a group
of similar mutual funds. Past performance does not mean that the Fund will
achieve similar results in the future.
ANNUAL RETURN* (CLASS A SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1997 22.33%
1998 21.88%
1999 93.10%
BEST QUARTER: 55.68% (4th quarter of 1999)
WORST QUARTER: -18.58% (3rd quarter of 1998)
</TABLE>
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE
BEEN LOWER, TOO.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
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1 YR SINCE INCEPTION
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<S> <C> <C>
Class A shares 83.44% 39.88% (since 12-31-96)
Class B shares 86.47% 40.65% (since 12-31-96)
Class C shares 88.56% 40.68% (since 12-31-96)
Class Z shares 93.55% 42.60% (since 12-31-96)
S&P 400 Mid-Cap Index(2) 14.72% 21.81% (since 12-31-96)
Lipper Average(3) 72.56% 30.78% (since 12-31-96)
</TABLE>
<TABLE>
<S> <C>
1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND
EXPENSES. WITHOUT THE DISTRIBUTION AND SERVICE (12b-1) FEE
WAIVER FOR CLASS A SHARES, THE RETURNS WOULD HAVE BEEN
LOWER.
2 THE STANDARD & POOR'S MID-CAP 400 STOCK INDEX (S&P 400
MID-CAP INDEX)--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 OR OPERATING EXPENSES OF A
MUTUAL FUND. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED
THE EFFECT OF SALES CHARGES AND OPERATING EXPENSES. THE
SECURITIES IN THE S&P 400 MID-CAP INDEX MAY BE VERY
DIFFERENT FROM THOSE IN THE FUND. SOURCE: LIPPER INC.
3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL
MUTUAL FUNDS IN THE LIPPER MID-CAP GROWTH 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. SOURCE: LIPPER INC.
</TABLE>
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3
<PAGE>
RISK/RETURN SUMMARY
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FEES AND EXPENSES
This table shows the sales charges, fees and expenses that you may pay if you
buy and hold shares of each 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>
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CLASS A CLASS B CLASS C CLASS Z
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<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
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
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CLASS A CLASS B CLASS C CLASS Z
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<S> <C> <C> <C> <C>
Management fees .60% .60% .60% .60%
+ Distribution and service (12b-1) fees .30%(4) 1.00% 1.00% None
+ Other expenses .37% .37% .37% .37%
= Total annual Fund operating expenses 1.27% 1.97% 1.97% .97%
- Fee waiver or expense reimbursement .05% None None None
= NET ANNUAL FUND OPERATING EXPENSES 1.22%(4) 1.97% 1.97% .97%
</TABLE>
<TABLE>
<S> <C>
1 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. CLASS B SHARES CONVERT TO
CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN
18 MONTHS OF PURCHASE.
4 FOR THE FISCAL YEAR ENDING 10-31-00, THE DISTRIBUTOR OF THE
FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND
SERVICE (12b-1) FEES FOR CLASS A SHARES TO .25 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
</TABLE>
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4 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
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, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during the
first year. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
<TABLE>
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1 YR 3 YRS 5 YRS 10 YRS
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<S> <C> <C> <C> <C>
Class A shares $618 $878 $1,158 $1,953
Class B shares $700 $918 $1,162 $2,030
Class C shares $398 $712 $1,152 $2,373
Class Z shares $ 99 $309 $ 536 $1,190
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
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1 YR 3 YRS 5 YRS 10 YRS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $618 $878 $1,158 $1,953
Class B shares $200 $618 $1,062 $2,030
Class C shares $298 $712 $1,152 $2,373
Class Z shares $ 99 $309 $ 536 $1,190
</TABLE>
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5
<PAGE>
HOW THE FUND INVESTS
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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 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 beginning at $500 million. The
upper capitalization limit is 300% of the dollar-weighted median market
capitalization of the S&P 400 Mid-Cap Index. As of December 31, 1999, this
number was $9 billion. Market capitalization is measured at the time of
measurement.
In addition to buying equities, the Fund may invest in other equity-related
securities. Equity-related securities include American Depositary Receipts
(ADRs); common stocks; nonconvertible preferred stocks; warrants and rights that
can be exercised to obtain stock; investments in various types of business
ventures, including partnerships and joint ventures; real estate investment
trusts (REITs); and similar securities.
We also may buy convertible securities. These are securities--like bonds,
corporate notes and preferred stocks--that we can convert 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, in the opinion of the investment adviser, the stock has
experienced a fundamental disappointment in earnings; it has reached an
intermediate-term price objective and its outlook no longer seems sufficiently
promising; a relatively more attractive stock emerges; or the stock has
experienced adverse price movements.
For more information, see "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.
- -------------------------------------------------------------------
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.
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6 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
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.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to try to increase the Fund's returns or protect its
assets if market conditions warrant.
OTHER EQUITY SECURITIES
The Fund can invest up to 35% of total assets in equity securities of companies
with larger or smaller market capitalizations than previously noted.
The Fund may participate in the initial public offering (IPO) market. IPO
investments may increase the Fund's total returns. As the Fund's assets grow,
the impact of IPO investments will decline, which may reduce the Fund's total
returns.
FOREIGN SECURITIES
The Fund can invest up to 35% of total assets in FOREIGN SECURITIES, including
stocks and other equity-related securities, money market instruments and other
investment-grade fixed-income securities of foreign issuers, including those in
developing countries. For purposes of the 35% limit, we do not consider ADRs and
other similar receipts or shares to be foreign securities.
FIXED-INCOME OBLIGATIONS, INCLUDING BONDS AND MONEY MARKET INSTRUMENTS
Fixed-income obligations include bonds and notes. The Fund can invest up to 35%
of total assets in investment-grade corporate or government obligations.
Investment-grade obligations are rated in one of the top four long-term quality
ratings by a major rating service (such as Baa/BBB or better by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group, respectively). We
also may 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. Generally, fixed-income
securities provide a fixed rate of return, but provide less opportunity for
capital appreciation than investing in stocks.
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7
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
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. The
Fund will purchase money market instruments only in one of the two highest
short-term quality ratings of a major rating service.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in cash or 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.
REPURCHASE AGREEMENTS
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 and is, in effect, a loan by the
Fund.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets. We cannot guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Fund will not lose money. Derivatives--such as futures, options,
foreign currency forward 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 benchmark--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. The investment adviser will consider other
factors (such as cost) in deciding whether to employ any particular strategy or
use any particular instrument. Any derivatives we use may not match the Fund's
underlying holdings.
OPTIONS. The Fund may purchase and sell put and call options on equity
securities, financial indexes and foreign currencies traded on U.S. or foreign
securities exchanges or in the over-the-counter market. An OPTION is the right
to buy or sell securities or currencies in exchange for a premium. The Fund will
sell only covered options.
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8 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
FUTURES CONTRACTS AND RELATED OPTIONS
FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may purchase and sell financial
futures contracts and related options on financial futures. A FUTURES CONTRACT
is an agreement to buy or sell a set quantity of an underlying product at a
future date, or to make or receive a cash payment based on the value of a
securities index. The Fund also may enter into foreign currency forward
contracts to protect the value of its assets against future changes in the level
of foreign exchange rates. A FOREIGN CURRENCY FORWARD CONTRACT is an obligation
to buy or sell a given currency on a future date at a set price.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."
ADDITIONAL STRATEGIES
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
securities with legal or contractual restrictions on resale, 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, which means they 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 an annual
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. High portfolio turnover (100% or more)
results in higher brokerage commissions and other transaction costs and can
affect the Fund's performance. It also can result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
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9
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. See,
too, "Description of the Fund, Its Investments and Risks" in the SAI.
INVESTMENT TYPE
<TABLE>
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% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
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<S> <C> <C>
- ----------------------------------------------------------------------------------
STOCKS OF SMALL AND -- Individual stocks -- Historically, stocks
MEDIUM-SIZED U.S. could lose value have outperformed
COMPANIES -- The equity markets other investments
could go down, over the long term
AT LEAST 65% resulting in a -- Generally, economic
decline in value of growth means higher
the Fund's corporate profits,
investments which leads to an
-- Stocks of small and increase in stock
medium-sized prices, known as
companies are more capital appreciation
volatile and may -- Highly successful
decline more than smaller companies can
those in the S&P 500 outperform larger
Index ones
-- Smaller companies are
more likely to
reinvest earnings and
not pay dividends
-- Changes in interest
rates may affect the
securities of small
and medium-sized
companies more than
the securities of
larger companies
-- Changes in economic or
political conditions,
both domestic and
international, may
result in a decline
in value of the
Fund's investments
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</TABLE>
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10 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
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INVESTMENT TYPE (CONT'D)
<TABLE>
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% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
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<S> <C> <C>
- ----------------------------------------------------------------------------------------
STOCKS OF LARGER OR SMALLER -- Similar risks to small -- Not as likely to lose
U.S. COMPANIES and medium-sized U.S. value as stocks of
companies small and
UP TO 35% -- Companies that pay medium-sized
dividends may not do companies
so if they don't have -- May be a source of
profits or adequate dividend income
cash flow
- ----------------------------------------------------------------------------------------
FIXED-INCOME OBLIGATIONS -- The Fund's holdings, -- Bonds have generally
share price and total outperformed money
UP TO 35% return may fluctuate market instruments
in response to bond over the long term,
market movements with less risk than
-- Credit risk--the risk stocks
that the default of -- Most bonds will rise
an issuer would leave in value when
the Fund with unpaid interest rates fall
interest or -- Regular interest
principal. The lower income
a bond's quality, the -- Investment-grade bonds
higher its potential have a lower risk of
volatility default than junk
-- Market risk--the risk bonds
that the market value -- High-quality debt
of an investment may obligations generally
move up or down, are more secure than
sometimes rapidly or stocks since
unpredictably. Market companies must pay
risk may affect an their debts before
industry, a sector or they pay dividends
the market as a whole -- Principal and interest
-- Interest rate on government
risk--the risk that securities may be
the value of most guaranteed by the
bonds will fall when issuing government
interest rates rise.
The longer a bond's
maturity and the
lower its credit
quality, the more its
value typically
falls. It can lead to
price volatility
- ----------------------------------------------------------------------------------------
</TABLE>
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11
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
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% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
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<S> <C> <C>
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FOREIGN SECURITIES -- Foreign markets, -- Investors can
economies and participate in the
UP TO 35% political systems may growth of foreign
not be as stable as markets and companies
in the U.S., operating in those
particularly those in markets
developing countries -- Changing value of
-- Currency risk-- foreign currencies
changing value of -- Opportunities for
foreign currencies diversification
can cause losses
-- May be less liquid
than U.S. stocks and
bonds
-- Differences in foreign
laws, accounting
standards, public
information, custody
and settlement
practices provide
less reliable
information on
foreign investments
and involve more
risks
- ----------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Fund could make
futures, options and money and protect
PERCENTAGE VARIES foreign currency against losses if the
forward contracts investment analysis
that are used for proves correct
hedging purposes may -- Derivatives that
not fully offset the involve leverage
underlying positions could generate
and this could result substantial gains at
in losses to the Fund low cost
that would not have -- One way to manage the
otherwise occurred Fund's risk/return
-- Derivatives used for balance is by locking
risk management may in the value of an
not have the intended investment ahead of
effects and may time
result in losses or
missed opportunities
-- The other party to a
derivatives contract
could default
-- Derivatives that
involve leverage
could magnify losses
-- Certain types of
derivatives involve
costs to the Fund
that can reduce
returns
- ----------------------------------------------------------------------------------------
</TABLE>
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12 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
- ----------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer a more
value precisely attractive yield or
UP TO 15% OF NET ASSETS -- May be difficult to potential for growth
sell at the time or than more widely
price desired traded securities
- ----------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES -- Not all -- May preserve the
U.S. government Fund's assets
UP TO 35% securities are -- Regular interest
insured or guaranteed income
by the -- Generally more secure
U.S. government, but than lower quality
only by the issuing debt securities and
agency equity securities
-- Limits potential for -- Principal and interest
capital appreciation may be guaranteed by
-- See market risk, the U.S. government
credit risk and
interest rate risk
- ----------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for -- May preserve the
capital appreciation Fund's assets
UP TO 35% ON A NORMAL BASIS -- See credit risk and
AND UP TO 100% ON A market risk
TEMPORARY BASIS
- ----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------
BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager, Investment
Adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers, who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended October 31, 1999, the Fund paid PIFM management fees of .60% of the Fund's
average net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of December 31, 1999, PIFM served as the
manager to all 43 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $75.6 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street, Newark,
NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
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 to 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
- -------------------------------------------------------------------
14 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------
Team Analyst for small growth stocks in 1991, 1992 and 1993. Ms. Hirsch holds a
B.S. from Brooklyn College and is a member of the Financial Analysts Federation
and the New York Society of Security Analysts.
As a growth investor, Ms. Hirsch seeks companies that will produce superior
earnings.
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 "Fees and Expenses" tables.
- --------------------------------------------------------------------------------
15
<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 of ordinary income and any
realized net CAPITAL GAINS 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. Dividends
and distributions from the Fund also may be subject to state and local income
tax in the state where you live.
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 you hold your
shares 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 realized net CAPITAL GAINS to shareholders--
typically once a year. Capital gains 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 more than one year later sold the shares for a
total of $1,500, the Fund has net long-term 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--if a security is held more than one year before it
is sold, LONG-TERM capital gains are taxed at the rate of 20%, but if the
security is held one year or less, SHORT-TERM capital gains are taxed at
ordinary income rates of up to 39.6%. Different rates apply to corporate
shareholders.
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
- -------------------------------------------------------------------
16 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
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
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 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 calendar 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 taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions and sale proceeds.
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 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 thereafter received a distribution. That is not so
- --------------------------------------------------------------------------------
17
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend to reflect the payout although this may
not be apparent because the value of each share of the Fund also will be
affected by the market changes, if any. 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.
QUALIFIED OR TAX-DEFERRED 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, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
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.
- -------------------------------------------------------------------
RECEIPTS FROM SALE $ --> +$ CAPITAL GAIN
(taxes owed)
OR
RECEIPTS FROM SALE $ --> -$ CAPITAL LOSS
(offset against gain)
- -------------------------------------------------------------------
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares). If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other
- -------------------------------------------------------------------
18 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
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 Form 1099; however, proceeds from the sale or exchange will
be reported on Form 1099-B. 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 Internal
Revenue Service. 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.
- --------------------------------------------------------------------------------
19
<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 Fund's sale of
its 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 six years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are higher
than Class A share expenses. With Class C shares, you pay a 1% front-end sales
charge and a 1% CDSC if you sell within 18 months of purchase, 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 and the impact of
the varying distribution fees
-- 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
- -------------------------------------------------------------------
20 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
-- 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.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
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>
- ---------------------------------------------------------------------------------------
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 $100 $100 $100 None
subsequent purchases(1)
Maximum initial sales 5% of the None 1% of the None
charge public public
offering offering
price price
Contingent Deferred Sales None If sold 1% on sales None
Charge (CDSC)(2) during: made within
Year 1 5% 18 months of
Year 2 4% purchase(2)
Year 3 3%
Year 4 2%
Year 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees (.25 of 1%
shown as a percentage of currently)
average net assets(3)
</TABLE>
<TABLE>
<S> <C>
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 "HOW TO SELL YOUR SHARES--CONTINGENT
DEFERRED SALES CHARGE (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. THE SERVICE FEE FOR CLASS A, CLASS B
AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE FOR
CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE .25 OF
1% SERVICE FEE) AND IS .75 OF 1% FOR CLASS B AND CLASS C
SHARES. FOR THE FISCAL YEAR ENDING 10-31-00, THE DISTRIBUTOR
OF THE FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS
DISTRIBUTION AND SERVICE (12B-1) FEES FOR CLASS A SHARES TO
.25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A
SHARES.
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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 how
the sales charge decreases as the amount of your investment increases.
<TABLE>
- -------------------------------------------------------------------------------------
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
OFFERING PRICE AMOUNT INVESTED REALLOWANCE
AMOUNT OF PURCHASE
- -------------------------------------------------------------------------------------
<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* None None None
</TABLE>
<TABLE>
<S> <C>
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A
SHARES, UNLESS YOU QUALIFY TO BUY CLASS Z SHARES.
</TABLE>
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy 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
current 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 (note: you must notify the
Transfer Agent if you qualify for Rights of Accumulation)
-- 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.
The Distributor may reallow Class A's sales charge to dealers.
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of
- -------------------------------------------------------------------
22 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
eligible employees. For more information about these requirements, call
Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, 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, or
-- Mutual fund "supermarket" programs where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, the Prudential
mutual funds, the subadvisers of the Prudential mutual funds and registered
representatives and employees of brokers that have entered into a selected
dealer agreement with the Distributor. To qualify for a reduction or waiver of
the sales charge, 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 Charge--Class A
Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
INVESTMENT 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 (Prudential Securities) or one of its affiliates. These
purchases must be made within 60 days of the redemption. To qualify for this
waiver, you must do one of the following:
-- purchase your shares through an account at Prudential Securities,
-- purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation, or
-- purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. 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 appropriate.
QUALIFYING FOR CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
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, links its clients' accounts to a master account
in the sponsor's name and charges its clients a management,
consulting or other fee for its services, or
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
- -------------------------------------------------------------------
24 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the
following:
-- 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,
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund), and
-- 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 A or 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 received 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."
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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 check the price of mutual funds daily.
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 (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. We do not determine the
NAV on days when we have not received any orders to purchase, sell or exchange
Fund shares, 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
the 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.
- -------------------------------------------------------------------
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.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
26 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: 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 financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b) plans, pension and profit-sharing plans), your financial adviser 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 declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for PruTector coverage after
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
the initial 6-month enrollment period will need to provide satisfactory evidence
of insurability. This insurance is subject to other restrictions and is not
available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption 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 Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
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, your broker must receive your order to sell by 4:15 p.m. New York
Time to process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: 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, the Distributor or your broker 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 sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase
- -------------------------------------------------------------------
28 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
shares by wire, certified check or cashier's check. 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. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust and you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker-dealer or credit union. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one 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 for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
-- 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.
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
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 is 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). For both Class B and Class C shares, the CDSC is
calculated based on 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 holding period for purposes of determining the applicable 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, 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 on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."
- -------------------------------------------------------------------
30 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
WAIVER OF THE CDSC--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for purchases by certain group retirement
plans for which Prudential or brokers not affiliated with Prudential provide
administrative or recordkeeping services. The CDSC also will be waived for
certain redemptions by benefit plans sponsored by Prudential and its affiliates.
For more information, call Prudential at (800) 353-2847.
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
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
qualified 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
one-time 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
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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. After an exchange, at redemption
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. 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 or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding period for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange
- -------------------------------------------------------------------
32 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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 Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if 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
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The decision
may be based upon dollar amount, volume and frequency of trading. The Fund may
notify a market timer of rejection of an exchange purchase order after the day
the order is placed. If the Fund allows a market timer to trade Fund shares, it
may require the market timer to enter into a written agreement to follow certain
procedures and limitations.
- --------------------------------------------------------------------------------
33
<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 annual report and 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 SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS A SHARES (FISCAL PERIODS ENDED 10-31)
<TABLE>
- -------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999(5) 1998 1997(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.01 $11.92 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.13) (.11) (.08)
Net realized and unrealized gain on investment
transactions 7.61 .41 2.00
TOTAL FROM INVESTMENT OPERATIONS 7.48 .30 1.92
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized gains (.33) (.21) --
NET ASSET VALUE, END OF PERIOD $19.16 $12.01 $11.92
TOTAL RETURN(2) 63.65% 2.63% 19.20%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997(1)
- -------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $85,595 $32,183 $33,124
Average net assets (000) $52,984 $33,831 $28,141
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees(4) 1.22% 1.25% 1.46%(3)
Expenses, excluding distribution fees .97% 1.00% 1.21%(3)
Net investment income (loss) (.80)% (.88)% (.92)%(3)
Portfolio turnover 153% 177% 107%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 12-31-96 (WHEN CLASS A
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.
4 THE DISTRIBUTOR OF THE FUND AGREED TO LIMIT ITS DISTRIBUTION
FEES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS A SHARES.
5 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
</TABLE>
- --------------------------------------------------------------------------------
34 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS B SHARES (FISCAL PERIODS ENDED 10-31)
<TABLE>
- -------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999(4) 1998 1997(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.83 $11.85 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.24) (.20) (.14)
Net realized and unrealized gain on investment
transactions 7.46 .39 1.99
TOTAL FROM INVESTMENT OPERATIONS 7.22 .19 1.85
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized gains (.33) (.21) --
NET ASSET VALUE, END OF PERIOD $18.72 $11.83 $11.85
TOTAL RETURN(2) 62.39% 1.71% 18.50%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997(1)
- -------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $184,955 $83,407 $82,070
Average net assets (000) $127,249 $86,713 $67,420
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.97% 2.00% 2.21%(3)
Expenses, excluding distribution fees .97% 1.00% 1.21%(3)
Net investment loss (1.55)% (1.63)% (1.67)%(3)
Portfolio turnover 153% 177% 107%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 12-31-96 (WHEN CLASS B
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.
4 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS C SHARES (FISCAL PERIODS ENDED 10-31)
<TABLE>
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999(4) 1998 1997(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.83 $11.85 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.24) (.20) (.14)
Net realized and unrealized gain on investment
transactions 7.46 .39 1.99
TOTAL FROM INVESTMENT OPERATIONS 7.22 .19 1.85
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized gains on investment
transactions (.33) (.21) --
NET ASSET VALUE, END OF PERIOD $18.72 $11.83 $11.85
TOTAL RETURN(2) 62.39% 1.71% 18.50%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997(1)
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $23,578 $6,774 $6,477
Average net assets (000) $12,380 $6,949 $5,526
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.97% 2.00% 2.21%(3)
Expenses, excluding distribution fees .97% 1.00% 1.21%(3)
Net investment loss (1.56)% (1.63)% (1.69)%(3)
Portfolio turnover 153% 177% 107%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 12-31-96 (WHEN CLASS C
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.
4 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
</TABLE>
- --------------------------------------------------------------------------------
36 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL PERIODS ENDED 10-31)
<TABLE>
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999(4) 1998 1997(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.06 $11.93 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.09) (.04) (.03)
Net realized and unrealized gain on investment
transactions 7.64 .38 1.96
TOTAL FROM INVESTMENT OPERATIONS 7.55 .34 1.93
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized gains on investment
transactions (.33) (.21) --
NET ASSET VALUE, END OF PERIOD $19.28 $12.06 $11.93
TOTAL RETURN(2) 63.97% 2.97% 19.30%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997(1)
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $19,029 $2,439 $561
Average net assets (000) $7,796 $1,283 $261
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees .97% 1.00% 1.21%(3)
Expenses, excluding distribution fees .97% 1.00% 1.21%(3)
Net investment loss (.56)% (.63)% (.73)%(3)
Portfolio turnover 153% 177% 107%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 12-31-96 (WHEN CLASS Z
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.
4 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
</TABLE>
- --------------------------------------------------------------------------------
37
<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 financial adviser or call
us at (800) 225-1852. Please read the prospectus carefully before you invest or
send money.
STOCK FUNDS
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 SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE 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
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
PRUDENTIAL GLOBAL GROWTH FUND
PRUDENTIAL INTERNATIONAL VALUE FUND
PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
- -------------------------------------------------------------------
38 PRUDENTIAL EMERGING GROWTH FUND, INC. [LOGO] (800) 225-1852
<PAGE>
- -------------------------------------
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
TARGET FUNDS
TOTAL RETURN BOND FUND
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
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
- --------------------------------------------------------------------------------
39
<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.)
- --------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- ------------------------------------
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 20549-0102
By Electronic Request:
[email protected]
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call 1-202-942-8090.)
Via the Internet:
on the EDGAR Database at
http://www.sec.gov
- --------------------------------
CUSIP Nos.: Quotron Symbols:
Class A: 74431L107 PEEAX
Class B: 74431L206 PEEBX
Class C: 74431L305 --
Class Z: 74431L404 --
Investment Company Act File No.:
811-07811
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MF173A [LOGO] Printed on Recycled Paper
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PRUDENTIAL EMERGING GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 20, 2000
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 beginning at $500 million. The upper capitalization limit is 300%
of the dollar-weighted median market capitalization of the S&P 400 Mid-Cap
Index. Market capitalization is measured at the time of measurement. The Fund
may engage in various derivative transactions, such as using options on equity
securities, stock indexes and foreign currencies, foreign currency forward
contracts and futures contracts 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 January 20, 2000, a copy of which may be obtained from the Fund upon
request.
TABLE OF CONTENTS
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PAGE
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Fund History................................................ B-2
Description of the Fund, Its Investments and Risks.......... B-2
Investment Restrictions..................................... B-18
Management of the Fund...................................... B-19
Control Persons and Principal Holders of Securities......... B-22
Investment Advisory and Other Services...................... B-23
Brokerage Allocation and Other Practices.................... B-27
Capital Shares, Other Securities and Organization........... B-29
Purchase, Redemption and Pricing of Fund Shares............. B-30
Shareholder Investment Account.............................. B-38
Net Asset Value............................................. B-42
Taxes, Dividends and Distributions.......................... B-43
Performance Information..................................... B-46
Financial Statements........................................ B-48
Report of Independent Accountants........................... B-59
Appendix I--General Investment Information.................. I-1
Appendix II--Historical Performance Data.................... II-1
Appendix III--Information Relating to Prudential............ III-1
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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. The
Fund may engage in various derivative transactions, such as using options on
equity securities, stock indexes and foreign currencies, foreign currency
forward contracts and the purchase and sale of futures contracts 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 principal and
non-principal 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 beginning at $500 million. The upper capitalization limit is 300%
of the dollar-weighted median market capitalization of the Standard & Poor's
Mid-Cap 400 Stock Index (S&P 400 Mid-Cap Index). Market capitalization of the
companies will be measured at the time of measurement. The Fund will invest in
equity-related securities, including common stocks, nonconvertible preferred
stocks, securities convertible into or exchangeable for common or preferred
stock, equity investments in partnerships, joint ventures and other forms of
non-corporate investment, real estate investment trusts (REITS), American
Depositary Receipts (ADRs), American Depositary Shares (ADSs) and warrants and
rights exercisable for equity securities.
Securities of small and medium-sized companies have historically been more
volatile than those in the Standard & Poor's 500 Composite Stock Price Index
(S&P 500 Stock 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 indexes. 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.
AMERICAN DEPOSITARY RECEIPTS AND AMERICAN DEPOSITARY SHARES. ADRs and ADSs
are U.S. dollar-denominated certificates or shares issued by a United States
bank or trust company and represent the right to receive securities of a foreign
issuer deposited in a domestic bank or foreign branch of a United States bank
and traded on a United States exchange or in the over-the-counter market.
Generally, ADRs and ADSs are in registered form. There are no fees imposed on
the purchase or sale of ADRs and ADSs when purchased from the issuing bank or
trust company in the initial underwriting, although the issuing bank or trust
company may impose charges for the collection of dividends and the conversion of
ADRs and ADSs into the underlying securities. Investment in ADRs and ADSs has
certain advantages over direct investment in the underlying foreign securities
since: (1) ADRs and ADSs are U.S. dollar-denominated investments that are
registered domestically, easily transferable, and for which market quotations
are readily available, and (2) issuers whose securities are represented by ADRs
and ADSs are usually subject to auditing, accounting and financial reporting
standards comparable to those of domestic issuers.
WARRANTS AND RIGHTS. A warrant or right entitles the holder to purchase
equity securities at a specific price for a specific period of time. A warrant
gives the holder thereof the right to subscribe by a specified date to a stated
number of shares of stock of the issuer at a fixed price. Warrants tend to be
more volatile than the underlying stock, and if, at a warrant's expiration date,
the stock is trading at a price below the price set in the warrant, the warrant
will expire worthless. Conversely, if, at the expiration date, the underlying
stock is trading at a price higher than the price set in the warrant, the Fund
can acquire the stock at a price below its market value. Rights are similar to
warrants but normally have a shorter duration and are distributed directly by
the issuer to shareholders. Rights and warrants have no voting rights, receive
no dividends and have no rights with respect to the corporation issuing them.
B-2
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CONVERTIBLE 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. Convertible securities are generally senior to common stocks in a
corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock. Convertible securities may
also include preferred stocks.
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 stock). 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 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.
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 U.S.
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 U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES 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
B-3
<PAGE>
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 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.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
requirements of the Internal Revenue Code. To qualify, a REIT must distribute at
least 95% of its taxable income to its shareholders and receive at least 75% of
that income from rents, mortgages and sales of property. REITs offer investors
greater liquidity and diversification than direct ownership of a handful of
properties, as well as greater income
B-4
<PAGE>
potential than an investment in common stocks. Like any investment in real
estate, though, a REIT's performance depends on several factors, such as its
ability to find tenants for its properties, to renew leases and to finance
property purchases and renovations.
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,
semi-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 "semi-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 semi-government
issuers include, among others, the Province of Ontario and the City of
Stockholm.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of income
the Fund is required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. The Fund may, but need
not, enter into foreign currency forward 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 U.S. brokerage commissions. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If 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.
B-5
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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.
SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED SECURITIES. On
January 1, 1999, 11 of the 15 member states of the European Monetary Union
introduced the "euro" as a common currency. During a three-year transitional
period, the euro will coexist with each participating state's currency and, on
July 1, 2002, the euro is expected to become the sole currency of the
participating states. During the transition period, the Fund will treat the euro
as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indexes, and other features may require the realization of a gain or loss by the
Fund as determined under existing tax law.
The Fund's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expense relating to these actions.
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. 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 investment adviser, 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.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund may engage in various portfolio strategies, including using
derivatives to seek to reduce certain risks of its investments and to enhance
return. The Fund, and thus its investors, may lose money through any
unsuccessful use of these
B-6
<PAGE>
strategies. These strategies currently include the use of options, foreign
currency forward contracts, futures contracts, and options on such contracts.
The Fund's ability to use these strategies may be limited by various factors,
such as market conditions, regulatory limits and tax considerations, and there
can be no assurance that any of these strategies will succeed. If new financial
products and risk management techniques are developed, the Fund may use them 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 indexes and currencies that are traded on U.S. or foreign
securities exchanges or in the over-the-counter market to seek to enhance return
or to protect against adverse price fluctuations in securities in the Fund's
portfolio. These options will be on equity securities, financial indexes (for
example, S&P 500 Stock Index) 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 also may 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 as the writer of a put option, might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market 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.
The Fund will write only "covered" options. An 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.
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
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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 indexes, as described below.
OPTIONS ON SECURITIES INDEXES. In addition to options on securities, the
Fund may also purchase and sell put and call options on securities indexes
traded on U.S. or foreign securities exchanges or traded in the over-the-counter
markets. Options on securities indexes 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 indexes 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 indexes may have
different multipliers. Because exercises of index options are settled in cash, a
call writer cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. In addition, unless the Fund has other liquid assets
which are sufficient to satisfy the exercise of a call, the Fund would be
required to liquidate portfolio securities or borrow in order to satisfy the
exercise.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of security prices in the market generally or in an
industry or market segment rather than movements in the price of a particular
security. Accordingly, successful use by the Fund of options on indexes 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 STOCK 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
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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 INDEXES
The Fund's purchase and sale of options on indexes will be subject to risks
described above under "Risks of Transactions in Stock Options." In addition, the
distinctive characteristics of options on indexes 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 indexes 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 no greater
than the risk in connection with options on securities in the index.
SPECIAL RISKS OF WRITING CALLS ON INDEXES
Because exercises of index options are settled in cash, a call writer such
as the Fund cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. However, the Fund will write call options on indexes only
under the circumstances described below under "Limitations on Purchase and Sale
of Stock Options, Options on Stock Indexes 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
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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.
SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON INDEXES. 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.
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward contracts to protect the
value of its portfolio 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.
SPECIAL RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may
enter into foreign currency forward 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 subject 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 payment is 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. The Fund does not intend to
enter into such forward contracts to protect the value of its portfolio
securities on a regular or continuous basis. The Fund will also not enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount of
foreign currency in excess
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of the value of the Fund's portfolio securities or other assets denominated in
that currency. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with regard to overall diversification strategies. However, the Fund
believes that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interest of the Fund will thereby be
served. If a Fund enters into a position hedging transaction, 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 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, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign currency that
the Fund is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency.
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 foreign currency forward 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. Also 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, they also tend to
limit any potential gain which might result should the value of such currency
increase. The Fund's ability to enter into foreign currency forward contracts
may be limited by certain requirements for qualification as a regulated
investment company under the Internal Revenue Code. See "Taxes, Dividends and
Distributions."
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
FUTURES CONTRACTS 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 indexes 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
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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 indexes 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 indexes 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 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.
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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 indexes, 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
indexes.
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
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
indexes, options are traded on futures contracts for various U.S. and foreign
stock indexes 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 RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
the investment adviser's predictions of movements in the direction of the
securities, foreign currency or interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of these strategies
include (1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any
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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 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 INDEXES 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 indexes 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
indexes 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 indexes 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 with its
Custodian, or pledge to a broker as collateral for the option, cash or other
liquid assets, 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 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
B-14
<PAGE>
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'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.
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).
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 a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money is
invested in the repurchase agreement. The Fund's repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value of
the instruments declines, the Fund will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Fund may incur a loss.
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the investment adviser. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the 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. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividend or interest paid
on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. 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.
B-15
<PAGE>
A loan may be terminated by the borrower or the Fund at any time. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund can 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 up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 20% of
its total assets to secure these borrowings. If the Fund 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
(within 3 days) 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. If the
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets, as required by applicable law. Illiquid securities include
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. 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 of 1933, as amended (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.
B-16
<PAGE>
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 privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Directors. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. 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, among others, 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 (for example, 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.
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."
SEGREGATED ASSETS
The Fund will segregate with its Custodian, State Street Bank and Trust
Company (State Street), cash, U.S. Government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets equal in value to its obligations in respect of potentially leveraged
transactions. These include forward contracts, when-issued and delayed delivery
securities, futures contracts, written options and options on futures contracts
(unless otherwise covered). If collateralized or otherwise covered, in
accordance with Commission guidelines, these will not be deemed to be senior
securities. The assets segregated will be 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 cash or 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, certificates of deposit, bankers' acceptances and
time deposits of domestic and foreign banks, obligations issued or guaranteed by
the U.S. Government, its agencies or its instrumentalities subject to its
investment policies. These instruments will be U.S. dollar denominated or
denominated in a foreign currency. 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.
B-17
<PAGE>
(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 years ended October 31, 1999 and 1998 was 153% and 177%,
respectively. 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 (100% or more) 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.
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
B-18
<PAGE>
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.
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Delayne Dedrick Gold (61) Director Marketing and Management Consultant.
*Robert F. Gunia (53) Vice President and Director Chief Administrative Officer (since June 1999) of Prudential
Investments; Vice President (since September 1997) of The
Prudential Insurance Company of America (Prudential); Executive
Vice President and Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM); formerly Senior Vice
President (March 1987 - May 1999) of Prudential Securities
Incorporated (Prudential Securities) and 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.
Douglas H. McCorkindale (60) 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.
Thomas T. Mooney (58) Director President of the Greater Rochester Metro Chamber of Commerce;
formerly Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority, Rochester Jobs, Inc.,
Executive Service Corps of Rochester, Monroe County Industrial
Development Corporation and Northeast-Midwest Institute.
Stephen P. Munn (57) 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).
*David R. Odenath, Jr. (42) Director Officer in Charge, President, Chief Executive Officer and Chief
Operating Officer (since June 1999), PIFM; Senior Vice President
(since June 1999), Prudential; formerly Senior Vice President
(August 1993 - May 1999), PaineWebber Group, Inc.
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Richard A. Redeker (56) Director Formerly President, Chief Executive Officer and Director (October
1993 - September 1996) 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.
Robin B. Smith (60) 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.
*John R. Strangfeld, Jr. (45) President and Director Chief Executive Officer, Chairman, President and Director (since
January 1990), of The Prudential Investment Corporation,
Executive Vice President (since February 1998), Prudential
Global Asset Management Group of Prudential, and Chairman (since
August 1989), Pricoa Capital Group; formerly various positions
to Chief Executive Officer (November 1994 - December 1998),
Private Asset Management Group of Prudential and Senior Vice
President (January 1986 - August 1989), Prudential Capital
Group, a unit of Prudential.
Louis A. Weil, III (58) Director Chairman (since January 1999), President and Chief Executive
Officer (since January 1996) and Director (since September 1991)
of Central Newspapers, Inc.; Chairman of the Board (since
January 1996), Publisher and Chief Executive Officer (August
1991 - December 1995) of Phoenix Newspapers, Inc.; 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.
Clay T. Whitehead (61) Director President (since May 1983) of National Exchange Inc. (new
business development firm).
Grace C. Torres (40) 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.
</TABLE>
B-20
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Marguerite E.H. Morrison (43) 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 (46) 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.
** 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.
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 currently pays each of its Directors who is not an affiliated person of
PIFM or the investment adviser annual compensation of $2,000, 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 75.
B-21
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended October 31, 1999 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, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
AGGREGATE PAID TO BOARD MEMBERS
COMPENSATION FROM FUND
NAME OF DIRECTOR FROM FUND COMPLEX
- ------------------------------ ------------ ---------------------
<S> <C> <C>
Edward D. Beach (++) $2,000 $142,500(43/70)*
Delayne Dedrick Gold $2,000 $144,500(43/70)*
Robert F. Gunia (+) -- None
Douglas H. McCorkindale** $2,000 $ 80,000(24/49)*
Thomas T. Mooney** $2,000 $129,500(35/75)*
Stephen P. Munn $2,000 $ 62,250(29/53)*
David R. Odenath, Jr. (+) -- None
Richard A. Redeker $1,500 $ 95,000(29/53)*
Robin B. Smith** $2,000 $ 96,000(32/44)*
John R. Strangfeld, Jr. (+) -- None
Louis A. Weil, III $2,000 $ 96,000(29/53)*
Clay T. Whitehead $2,000 $ 77,000(38/66)*
</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, 1999 includes amounts deferred at the election of Directors
under the funds' deferred compensation plans. Including accrued interest, total
compensation amounted to approximately $97,916, $135,102 and $156,478 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.
++ Mr. Beach retired on December 31, 1999.
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 contingent deferred
sales charge to a limited group of investors.
As of December 31, 1999, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.
As of December 31, 1999, beneficial owners, directly or indirectly, of more
than 5% of any class of shares of the Fund were:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME ADDRESS CLASS (% OF CLASS)
- ---------------------------------------- ---------------------------- ----------------------------------- ---------------
<S> <C> <C> <C>
Oakbrook Realty & Investments LLC 1000 Royce Blvd Z 75,552 (5.7%)
Oakbrook, IL 60181-4809
</TABLE>
As of December 31, 1999, Prudential Securities was the record holder for
other beneficial owners of 4,249,324 Class A shares (approximately 73.1% of such
shares outstanding), 9,064,805 Class B shares (approximately 74.2% of such
shares outstanding), 1,595,175 Class C shares (approximately 90.7% of such
shares outstanding) and 1,280,489 Class Z shares (approximately 97.2% 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.
B-22
<PAGE>
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 December 31,
1999, PIFM managed and/or administered open-end and closed-end management
investment companies with assets of approximately $75.6 billion. According to
the Investment Company Institute, as of September 30, 1999, the Prudential
Mutual Funds were the 20th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent and dividend distribution 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 has hired The Prudential Investment Corporation, doing
business as Prudential Investments (PI, the investment adviser or the
Subadviser), to provide subadvisory services to 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 investment adviser 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 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, (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.
B-23
<PAGE>
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
For the fiscal years ended October 31, 1999 and 1998 and the period ended
October 31, 1997, PIFM received management fees of $1,202,452, $772,662 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, PI was
reimbursed by PIFM for the reasonable costs and expenses incurred by PI in
furnishing these services. Effective January 1, 2000, PI is paid by PIFM at an
annual rate of .30 of 1% of the Fund's average daily net assets (representing
half of the compensation received from the Fund by PIFM).
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. The Distributor is a subsidiary 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.
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.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
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
B-24
<PAGE>
exceed .30 of 1%. The Distributor has contractually agreed to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending
October 31, 2000 and voluntarily limited its distribution-related fees for the
fiscal year ended October 31, 1999 to .25 of 1% of the average daily net assets
of the Class A shares.
For the fiscal year ended October 31, 1999, the Distributor received
payments of $132,460 under the Class A Plan and spent approximately $132,460 in
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, 1999, the Distributor also
received approximately $296,200 in initial sales charges attributable to
Class A shares.
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 and, with respect to Class C shares, initial sales
charges.
CLASS B PLAN. For the fiscal year ended October 31, 1999, the Distributor
received $1,272,492 from the Fund under the Class B Plan and spent approximately
$1,797,805 in distributing the Fund's Class B shares. It is estimated that of
the latter total amount, approximately 0.12% ($2,209) was spent on printing and
mailing of prospectuses to other than current shareholders; 23.74% ($426,763)
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 76.14% ($1,368,833) on the aggregate of (1) payments of commissions
and account servicing fees to financial advisers (30.72% or $552,276) and
(2) an allocation on account of overhead and other branch office distribution-
related expenses (45.42% or $816,557). 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 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, 1999, the Distributor received approximately
$268,600 in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended October 31, 1999, the Distributor
received $123,798 under the Class C Plan and spent approximately $215,873 in
distributing Class C shares. It is estimated that of the latter total amount,
approximately 0.10% ($209) was spent on printing and mailing of prospectuses to
other than current shareholders; 1.75% ($3,779) 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 98.15% ($211,885) on the aggregate
of (1) payments of commissions and account servicing fees to financial advisers
(61.27% or $132,264) and (2) an allocation on account of overhead and other
branch office distribution-related expenses (36.88% or $79,621).
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal year ended October 31, 1999, the Distributor
received approximately $4,800 in contingent deferred sales charges attributable
to Class C shares. For the fiscal year ended October 31, 1999, the Distributor
also received approximately $98,000 in initial 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
B-25
<PAGE>
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 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.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for the Class A shares as described above. Fee waivers and subsidies will
increase the Fund's total return.
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. Interest charges
on unreimbursed distribution expenses 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 included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to each class of the
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.
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 $9.00, a new account set-up
fee of $2.00 for each manually established account and a monthly inactive zero
balance account fee of $.20 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.
B-26
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Although the Fund has not experienced any material problems with the services
provided by the Manager, Distributor, Transfer Agent or Custodian as a result of
the change from 1999 to 2000, there is a possibility that computer software
systems in use might be impaired or unavailable because of the way dates are
encoded and calculated. Such an event could have a negative impact on handling
securities trades, payments of interest and dividends, pricing and account
services. Although, at this time, there can be no assurance that there will be
no adverse impact on the Fund, the Manager, the Distributor, the Transfer Agent
and the Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000. The
Fund and its Board receive, and have received since early 1998, satisfactory
quarterly reports from the principal service providers as to their preparations
for year 2000 readiness, although there can be no assurance that the service
providers (or other securities market participants) will successfully complete
the necessary changes in a timely manner. Moreover, the Fund at this time has
not considered retaining alternative service providers or directly undertaken
efforts to achieve year 2000 readiness, the latter of which would involve
substantial expenses without an assurance of success.
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.
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.
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 favorable
price and efficient 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,
B-27
<PAGE>
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 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.
B-28
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund............ $2,883,176 $414,498 $377,018
Total brokerage commissions paid to Prudential
Securities and its foreign affiliates.................. $ 35,000 $ 7,744 $ 4,500
Percentage of total brokerage commissions paid to
Prudential Securities and its foreign affiliates....... 1.20% 1.9% 1.2%
</TABLE>
The Fund effected 1.20% of the total dollar amount of its transactions
involving the payment of commissions through Prudential Securities during the
period ended October 31, 1999. Of the total brokerage commissions paid during
that period, $36,230 (or 1.25%) 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, 1999. As of October 31, 1999, the Fund held
securities of Bear, Stearns & Co., Inc., Goldman, Sachs & Co., Morgan (J.P.)
Securities, Inc., and Salomon Smith Barney, Inc. in the amounts of $5,874,602,
$4,578,194, $5,874,602 and $5,874,602, respectively.
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 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.
B-29
<PAGE>
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 "How to Buy, Sell and Exchange 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, fund and 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) are approved by the Fund's investment adviser.
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, 1999, 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...... $19.16
Maximum sales charge (5% of offering price)................. 1.01
------
Maximum offering price to public............................ $20.17
======
CLASS B
Net asset value, redemption price and offering price to
public per Class B share*.................................. $18.72
======
CLASS C
Net asset value and redemption price per Class C share*..... $18.72
Sales charge (1% of offering price)......................... .19
------
Offering price to public.................................... $18.91
======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share.............................................. $19.28
======
</TABLE>
- ------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions.
B-30
<PAGE>
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.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
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,
- members of the Board of Directors of Prudential,
- real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent,
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,
B-31
<PAGE>
- 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,
- investors in Individual Retirement Accounts, provided the purchase is made
in a directed rollover to such Individual Retirement Account or with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution,
- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (for example,
mutual fund "wrap" or asset allocation programs), and
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
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.
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--How to
Buy Shares--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
- 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.
B-32
<PAGE>
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) 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 no longer qualify to purchase Class A shares at net
asset value by entering into a 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 or
its affiliates and through your broker will not be aggregated to determine the
reduced sales charge.
An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. 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. The effective date of an Investment Letter of Intent 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. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser 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 be granted
subject to confirmation of the investor's holdings. 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, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and
B-33
<PAGE>
(3) investors purchasing shares through other brokers. This waiver is not
available to investors who purchase shares directly from the Transfer Agent. You
must notify the Transfer Agent directly or through your broker if you are
entitled to this waiver and provide the Transfer Agent with such supporting
documents as it may deem appropriate.
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, 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, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:
- certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available investment option
- current and former Director/Trustees of the Prudential Mutual Funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
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.
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 the 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.
Rights of accumulation may be applied across the classes of the Prudential
Mutual Funds. However, 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 Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The reduced
sales charge 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.
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 Charge"
below. If you are redeeming your shares
B-34
<PAGE>
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 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 $100,000,
(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, and your
shares are held directly with the Transfer Agent, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or 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.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as 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 Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
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 same 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 Charge"
below. Exercise of the repurchase
B-35
<PAGE>
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 CHARGE
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 (one year for Class C shares purchased
before November 2, 1998) will be subject to a 1% CDSC. The CDSC will be deducted
from the redemption proceeds and reduce the amount paid to you. The CDSC will be
imposed on any redemption by you which reduces the current value of your
Class B or Class C shares to an amount which is lower than the amount of all
payments by you for shares during the preceding six years, in the case of
Class B shares, and 18 months, in the case of Class C shares (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 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.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------ -------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results 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 for Class B
shares and 18 months for Class C shares (one year for Class C shares bought
before November 2, 1998); 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 CHARGE--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, at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.
B-36
<PAGE>
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. For more information, call Prudential at (800)353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential Mutual Funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.
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 (a copy of
medically determinable physical or the trust agreement identifying the grantor will be
mental impairment which can be expected required as well)) is permanently disabled. The
to result in death or to be of letter must also indicate the date of disability.
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
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
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
B-37
<PAGE>
following formula: (1) the ratio of (a) the amounts paid for Class B shares
purchased at least seven years prior to the conversion date to (b) the total
amount paid for all Class B shares purchased and then held in your account
(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 (that is, $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.
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 at net asset value per
share. 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 broker. Any
shareholder who receives dividends or distributions in cash may subsequently
reinvest any 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 reinvestment will be made at the net asset value per share next
determined after receipt of the check by the Transfer Agent. Shares purchased
with reinvested dividends and/or distributions will not be subject to any CDSC
upon redemption.
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
B-38
<PAGE>
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 NAV 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 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.
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 first day of the month after the initial purchase, rather than
the date of the exchange.
B-39
<PAGE>
Class B and Class C shares of the Fund may also be exchanged for shares 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. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
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.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another 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)
B-40
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................................. $ 110 $ 165 $ 220 $ 275
20 Years............................................. 176 264 352 440
15 Years............................................. 296 444 592 740
10 Years............................................. 555 833 1,110 1,388
5 Years............................................. 1,371 2,057 2,742 3,428
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, quarterly, semi-annual or annual
redemption 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.
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 systematic 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 systematic 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 tax-deferred 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 the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
B-41
<PAGE>
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------- -------- --------
<S> <C> <C>
10 years................ $ 26,165 $ 31,291
15 years................ 44,676 58,649
20 years................ 68,109 98,846
25 years................ 97,780 157,909
30 years................ 135,346 244,692
</TABLE>
- ------------
(1)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, 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, such as, to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. A Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial adviser
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 indexes) 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
B-42
<PAGE>
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 indexes 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 foreign currency forward 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 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.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund is qualified as, intends to remain qualified as, and has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. This relieves the Fund (but not its shareholders) from paying
federal income tax on income and capital gains which are distributed to
shareholders, and permits net capital gains of the Fund (that is, the excess of
net long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in the Fund. Net capital gains of the Fund which are
available for distribution to shareholders will be computed by taking into
account any capital loss carryforward of the Fund.
Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that (a) the Fund derive at
least 90% of its annual gross income (without reduction for losses from the sale
or other disposition of securities or foreign currencies) from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or options thereon or foreign currencies, or
other income (including, but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
securities or currencies; (b) the Fund diversify its holdings so that, at the
end of each quarter of the taxable year, (i) at least 50% of the value of the
Fund's assets is represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the value of the Fund's assets and 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities of any one issuer (other than U.S. Government
securities); and (c) the Fund distribute to its shareholders at least 90% of its
net investment income and net short-term capital gains (that is, the excess of
net short-term capital gains over net long-term capital losses) in each year.
B-43
<PAGE>
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 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, anti-conversion 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.
Certain futures contracts and certain listed options (referred to as Section
1256 Contracts) held by the Fund 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 their fair market value on the last day of the
Fund's taxable year. Except with respect to certain foreign currency forward
contracts, 60% of any gain or loss recognized on such deemed sales and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a "straddle", 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.
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 foreign currency
forward contracts or dispositions of debt securities denominated in a foreign
currency attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss. These gains, referred to under the
Internal Revenue Code as "Section 988" gains or losses, increase or decrease the
amount of 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.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. In addition, dividends and capital gains
distributions also may be subject to state and local income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends or capital gains distributions which are expected to be
or have been announced.
Any loss realized on a sale, redemption or exchange of shares of 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.
B-44
<PAGE>
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. Net capital gain distributions 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.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts (described above) and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
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."
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
twelve months ending on October 31 of such calendar year. In addition, the Fund
must distribute during the calendar year all undistributed ordinary income and
undistributed capital gain net income from the prior calendar year or the
twelve-month period ending on October 31 of such prior calendar 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.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations that, in general, meet either
of the following tests: (a) at least 75% of its gross income is passive or
(b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or of any gain from disposition of the stock (collectively, PFIC income),
plus interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. The
Fund may make a "mark-to-market" election with respect to any marketable stock
it holds of a PFIC. If the election is in effect, at the end of the Fund's
taxable year, the Fund will recognize the amount of gains, if any, as ordinary
income with respect to PFIC stock. No loss will be recognized on PFIC stock,
except to the extent of gains recognized in prior years. Alternatively, 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.
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.
B-45
<PAGE>
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.
Below are the average annual total returns for the Fund's share classes for
the periods ended October 31, 1999.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
-------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Class A........................... 55.47% N/A N/A 25.49% (12-31-96)
Class B........................... 57.39 N/A N/A 26.08 (12-31-96)
Class C........................... 59.77 N/A N/A 26.32 (12-31-96)
Class Z........................... 63.97 N/A N/A 28.07 (12-31-96)
</TABLE>
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.
Below are the aggregate total returns for the Fund's share classes for the
periods ended October 31, 1999.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
-------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Class A.......................... 63.65% N/A N/A 100.21% (12-31-96)
Class B.......................... 62.39 N/A N/A 95.71 (12-31-96)
Class C.......................... 62.39 N/A N/A 95.71 (12-31-96)
Class Z.......................... 63.97 N/A N/A 101.44 (12-31-96)
</TABLE>
B-46
<PAGE>
The Fund also may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include data
from Lipper Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indexes. 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>
<S> <C> <C>
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(12/31/1925 12/31/1999)
Common Long-Term Inflation
Stocks Gov't. Bonds
11.4% 5.1% 3.1%
</TABLE>
- ------------
(1)Source: Ibbotson Associates. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Composite Stock Price 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, 1999
PRUDENTIAL EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--95.7%
COMMON STOCKS
- ------------------------------------------------------------
Advertising--2.3%
55,000 TMP Worldwide, Inc.(a) $ 3,434,062
80,700 Young & Rubicam, Inc. 3,692,025
------------
7,126,087
- ------------------------------------------------------------
Apparel--0.2%
26,500 Tommy Hilfiger Corp.(a) 748,625
- ------------------------------------------------------------
Broadcasting--5.7%
37,100 Gemstar International Group Ltd.(a) 3,223,062
33,700 Pegasus Communications Corp.(a) 1,491,225
57,700 Sinclair Broadcast Group, Inc.(a) 577,000
51,100 Spanish Broadcasting Systems,
Inc.(a) 1,360,538
70,600 TV Guide, Inc.(a) 3,715,325
39,900 Univision Communications, Inc.(a) 3,393,994
92,200 USA Networks, Inc.(a) 4,154,762
------------
17,915,906
- ------------------------------------------------------------
Cable & Pay Television Systems--4.9%
59,800 Adelphia Communications Corp.(a) 3,266,575
64,300 Cablevision Systems Corp.(a) 4,344,269
54,800 EchoStar Communications Corp.
(Class A)(a) 3,390,750
50,200 UnitedGlobalCom, Inc. (Class A)(a) 4,367,400
------------
15,368,994
- ------------------------------------------------------------
Commercial Services--1.2%
15,700 Lason Holdings, Inc.(a) 583,353
76,900 Profit Recovery Group Int'l.,
Inc.(a) 3,167,319
------------
3,750,672
- ------------------------------------------------------------
Computer Software & Services--24.5%
6,100 Akamai Technologies, Inc.(a) 885,644
17,600 Apple Computer, Inc.(a) 1,410,200
16,800 AppNet, Inc.(a) 731,850
68,800 At Home Corp.(a) $ 2,571,400
6,500 Breakaway Solutions, Inc.(a) 345,719
26,300 C-NET, Inc.(a) 1,241,031
153,300 CBT Group PLC (Ireland) (ADR)(a) 3,161,812
156,900 Checkfree Holdings Corp.(a) 5,864,137
23,400 Citrix Systems, Inc.(a) 1,500,525
4,000 Data Return Corp.(a) 60,250
65,000 Digital River, Inc.(a) 1,474,688
46,126 DST Systems, Inc.(a) 2,937,650
33,300 Electronic Arts, Inc.(a) 2,691,056
13,400 Inktomi Corp.(a) 1,359,263
39,910 Internet Capital Group, Inc.(a) 4,644,526
21,100 Intertrust Technologies Corp.(a) 1,149,950
119,300 Intuit, Inc.(a) 3,474,612
4,100 JNI Corp.(a) 219,094
39,700 Media Metrix, Inc.(a) 1,860,938
20,000 MicroStrategy, Inc.(a) 1,932,500
45,000 Network Solutions, Inc.(a) 5,332,500
141,000 Novell, Inc.(a) 2,828,812
81,600 Parametric Technology Corp.(a) 1,555,500
9,700 Phone.com, Inc.(a) 1,993,350
9,300 Proxicom, Inc.(a) 713,775
68,300 Rational Software Corp.(a) 2,919,825
20,500 RealNetworks, Inc.(a) 2,248,594
86,800 RSA Security, Inc.(a) 3,081,400
62,700 Safeguard Scientifics, Inc.(a) 5,274,637
40,100 SanDisk Corp.(a) 2,431,063
166,100 SunGard Data Systems, Inc.(a) 4,059,069
88,900 Technology Solutions Co.(a) 1,822,450
76,600 Whittman-Hart, Inc.(a) 2,944,312
------------
76,722,132
- ------------------------------------------------------------
Data Processing & Reproduction--1.5%
98,500 CSG Systems International, Inc.(a) 3,379,781
169,000 Informix Corp.(a) 1,288,625
------------
4,668,406
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
Portfolio of Investments as of October 31, 1999
PRUDENTIAL EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Diversified Industries--1.3%
35,000 Kulicke & Soffa Industries, Inc.(a) $ 1,030,313
51,100 Waters Corp.(a) 2,714,687
29,700 WESCO International, Inc.(a) 233,888
------------
3,978,888
- ------------------------------------------------------------
Electronics--18.5%
50,100 Altera Corp.(a) 2,436,113
62,200 Analog Devices, Inc.(a) 3,304,375
4,800 Chartered Semiconductor
Manufacturing, Ltd. (Singapore)
(ADR)(a) 159,300
118,700 Cognex Corp.(a) 3,553,581
47,700 Conexant Systems, Inc.(a) 4,453,987
39,000 Dallas Semiconductor Corp. 2,296,125
62,800 Electroglas, Inc.(a) 1,732,888
20,000 Etec Systems, Inc.(a) 763,750
17,300 Jabil Circuit, Inc.(a) 903,925
43,600 KLA Tencor Corp.(a) 3,452,575
92,200 Lattice Semiconductor Corp.(a) 3,261,575
45,000 Lexmark International Group,
Inc.(a) 3,512,813
51,900 LSI Logic Corp.(a) 2,760,431
51,400 Maxim Integrated Products, Inc.(a) 4,057,387
63,900 Micrel, Inc.(a) 3,474,563
25,500 National Semiconductor Corp.(a) 763,406
24,900 SDL, Inc.(a) 3,070,481
60,500 Solectron Corp.(a) 4,552,625
57,700 Symbol Technologies, Inc. 2,293,575
91,000 Teradyne, Inc.(a) 3,503,500
39,531 Texas Instruments, Inc. 3,547,908
------------
57,854,883
- ------------------------------------------------------------
Entertainment--2.2%
65,400 Imax Corp.(a) 1,357,050
71,800 Preview Travel, Inc.(a) 2,189,900
61,100 Royal Caribbean Cruises Ltd. 3,242,119
------------
6,789,069
- ------------------------------------------------------------
Financial Services--3.3%
21,300 Hooper Holmes, Inc. 572,438
89,800 Knight/Trimark Group, Inc. (Class
A)(a) 2,340,413
38,400 Metris Companies, Inc. 1,322,400
62,500 Radian Group, Inc. $ 3,300,781
54,500 The PMI Group, Inc. 2,827,187
------------
10,363,219
- ------------------------------------------------------------
Manufacturing--0.9%
79,200 Hasbro, Inc. 1,633,500
65,100 WestPoint Stevens, Inc.(a) 1,232,831
------------
2,866,331
- ------------------------------------------------------------
Medical Products & Services--4.0%
36,500 Forest Laboratories, Inc.(a) 1,674,437
41,000 Human Genome Sciences, Inc.(a) 3,582,375
27,193 Johnson & Johnson 2,848,467
23,362 Medical Manager Corp.(a) 1,171,020
13,000 MedImmune, Inc.(a) 1,456,000
40,000 QLT PhotoTherapeutics, Inc.(a) 1,695,000
------------
12,427,299
- ------------------------------------------------------------
Medical Technology--1.0%
48,300 PE Corp.-PE Biosystems Group 3,133,463
- ------------------------------------------------------------
Oil & Gas Equipment--0.9%
39,400 Cooper Cameron Corp.(a) 1,524,287
93,000 R & B Falcon Corp.(a) 1,156,688
------------
2,680,975
- ------------------------------------------------------------
Oil & Gas Services--1.8%
36,500 Apache Corp. 1,423,500
38,000 Devon Energy Corp. 1,477,250
68,100 Montana Power Co. 1,936,594
18,900 Smith International, Inc.(a) 653,231
------------
5,490,575
- ------------------------------------------------------------
Pharmaceuticals--2.1%
9,600 Express Scripts, Inc. (Class A)(a) 471,600
105,200 Schein Pharmaceuticals, Inc.(a) 894,200
44,800 Teva Pharmaceutical Industries Ltd.
(Israel) (ADR) 2,167,200
93,800 Watson Pharmaceuticals, Inc.(a) 2,978,150
------------
6,511,150
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
Portfolio of Investments as of October 31, 1999
PRUDENTIAL EMERGING GROWTH FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Radio & Television--1.7%
48,300 Emmis Communications Corp.
(Class A)(a) $ 3,483,638
79,300 Hearst-Argyle Television, Inc.(a) 1,610,781
8,400 Young Broadcasting, Inc. (Class
A)(a) 389,550
------------
5,483,969
- ------------------------------------------------------------
Retail--3.6%
97,000 BJ's Wholesale Club, Inc.(a) 2,988,812
195,000 Blockbuster, Inc. (Class A) 2,364,375
65,000 Dollar Tree Stores, Inc.(a) 2,831,563
27,300 Fastenal Co. 989,625
33,300 Great Atlantic & Pacific Tea Co.,
Inc. 951,131
63,500 Luxottica Group S.p.A. (Italy)(ADR) 1,218,406
------------
11,343,912
- ------------------------------------------------------------
Telecommunications--13.6%
67,600 ADC Telecommunications, Inc.(a) 3,223,675
15,500 AirGate PCS, Inc.(a) 775,000
152,500 AT&T Corp. - Liberty Media(a) 6,052,344
45,900 CIENA Corp.(a) 1,617,975
81,900 CommScope, Inc.(a) 3,265,762
121,900 Global TeleSystems Group, Inc.(a) 2,917,981
66,000 Microcell Telecommunications,
Inc.(a) 1,254,000
20,600 Millicom International Cellular
S.A.(a) 695,250
84,200 Powertel, Inc.(a) 4,957,275
84,700 RCN Corp.(a) 4,055,012
3,400 Sycamore Networks, Inc.(a) 731,000
69,900 Teleglobe, Inc. 1,655,756
41,800 Telephone and Data System, Inc. 4,817,450
8,000 Triton PCS Holdings, Inc. (Class
A)(a) 282,000
61,700 Tut Systems, Inc.(a) 2,059,238
40,300 Viatel, Inc.(a) 1,345,013
56,900 Western Wireless Corp. (Class A)(a) 3,008,588
------------
42,713,319
Transportation/Shipping--0.5%
36,200 Kansas City Southern Industries,
Inc. $ 1,717,238
------------
Total common stocks
(cost $221,445,995) 299,655,112
------------
- ------------------------------------------------------------
Units
- --------
RIGHTS(a)
6,240 Safeguard Pacific West Telecomm,
Inc. 0
------------
Total long-term investments
(cost $221,445,995) 299,655,112
------------
SHORT-TERM INVESTMENTS--7.1%
- ------------------------------------------------------------
Principal Amount
(000)
REPURCHASE AGREEMENT--7.1%
$ 22,202 Joint Repurchase Agreement Account,
5.21%, 11/1/99
(cost $22,202,000; Note 5) 22,202,000
------------
- ------------------------------------------------------------
Total Investments--102.8%
(cost $243,647,995; Note 4) 321,857,112
Liabilities in excess of other
assets--(2.8%) (8,700,371)
------------
Net Assets--100% $313,156,741
------------
------------
</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, 1999
<S> <C>
Investments, at value (cost $243,647,995)................................................................. $ 321,857,112
Receivable for investments sold........................................................................... 4,966,576
Receivable for Fund shares sold........................................................................... 2,209,088
Deferred expenses and other assets........................................................................ 56,209
Dividends and interest receivable......................................................................... 40,171
----------------
Total assets........................................................................................... 329,129,156
----------------
Liabilities
Bank overdraft............................................................................................ 669,696
Payable for investments purchased......................................................................... 13,960,197
Payable for Fund shares reacquired........................................................................ 893,319
Distribution fee payable.................................................................................. 179,940
Management fee payable.................................................................................... 146,303
Accrued expenses.......................................................................................... 122,960
----------------
Total liabilities...................................................................................... 15,972,415
----------------
Net Assets................................................................................................ $ 313,156,741
----------------
----------------
Net assets were comprised of:
Common stock, at par................................................................................... $ 16,588
Paid-in capital in excess of par....................................................................... 208,474,304
----------------
208,490,892
Accumulated net realized gain on investments........................................................... 26,456,732
Net unrealized appreciation on investments............................................................. 78,209,117
----------------
Net assets, October 31, 1999.............................................................................. $ 313,156,741
----------------
----------------
Class A:
Net asset value and redemption price per share
($85,594,675 / 4,466,613 shares of common stock issued and outstanding)............................. $19.16
Maximum sales charge (5% of offering price)............................................................ 1.01
----------------
Maximum offering price to public....................................................................... $20.17
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($184,955,168 / 9,877,955 shares of common stock issued and outstanding)............................ $18.72
----------------
----------------
Class C:
Net asset value and redemption price per share
($23,577,708 / 1,259,228 shares of common stock issued and outstanding)............................. $18.72
Sales charge (1% of offering price).................................................................... .19
----------------
Offering price to public............................................................................... $18.91
----------------
----------------
Class Z:
Net asset value, offering price and redemption price per share
($19,029,190 / 986,959 shares of common stock issued and outstanding)............................... $19.28
----------------
----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Loss October 31, 1999
<S> <C>
Income
Interest................................ $ 566,262
Dividends (net of foreign withholding
taxes of $8,751)..................... 278,100
----------------
Total income......................... 844,362
----------------
Expenses
Management fee.......................... 1,202,452
Distribution fee--Class A............... 132,460
Distribution fee--Class B............... 1,272,492
Distribution fee--Class C............... 123,798
Transfer agent's fees and expenses...... 325,000
Reports to shareholders................. 125,000
Custodian's fees and expenses........... 120,000
Registration fees....................... 80,000
Legal fees and expenses................. 30,000
Amortization of deferred organizational
costs................................ 24,393
Audit fees and expenses................. 20,000
Directors' fees and expenses............ 18,000
Miscellaneous........................... 6,911
----------------
Total expenses....................... 3,480,506
----------------
Net investment loss........................ (2,636,144)
----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on investment
transactions............................ 30,331,339
Net change in unrealized appreciation on
investments............................. 62,358,936
----------------
Net gain on investments.................... 92,690,275
----------------
Net Increase in Net Assets
Resulting from Operations.................. $ 90,054,131
----------------
----------------
</TABLE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended October 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment loss....... $ (2,636,144) $ (1,826,309)
Net realized gain on
investments............ 30,331,339 3,541,253
Net change in unrealized
appreciation
(depreciation)
on investments......... 62,358,936 (446,047)
---------------- --------------------
Net increase in net assets
resulting from
operations............. 90,054,131 1,268,897
---------------- --------------------
Distributions from net
realized gains (Note 1)
Class A................ (871,485) (590,230)
Class B................ (2,298,027) (1,495,124)
Class C................ (187,922) (125,163)
Class Z................ (67,704) (11,569)
---------------- --------------------
(3,425,138) (2,222,086)
---------------- --------------------
Fund share transactions (net
of share conversion) (Note
5)
Net proceeds from shares
sold................... 182,256,028 47,455,553
Net asset value of shares
issued in reinvestment
of distributions....... 3,294,708 2,134,825
Cost of shares
reacquired............. (83,825,537) (46,065,529)
---------------- --------------------
Net increase in net assets
from Fund share
transactions........... 101,725,199 3,524,849
---------------- --------------------
Total increase............... 188,354,192 2,571,660
Net Assets
Beginning of year............ 124,802,549 122,230,889
---------------- --------------------
End of year.................. $313,156,741 $124,802,549
---------------- --------------------
---------------- --------------------
</TABLE>
- --------------------------------------------------------------------------------
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. It
invests 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. Securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed to
be over-the-counter, are valued by a principal market maker or independent
pricing agent. Securities for which reliable market quotations are not available
or for which the pricing agent or principal market maker does not provide a
valuation or methodology or provides a valuation or methodology that does not
represent fair value are valued in accordance with procedures adopted by 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 American Institute of
Certified Public Accountants Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by
$2,636,144, decrease accumulated net realized gain on investments by $3,294,085
and increase paid-in capital by $657,941 due to the Fund experiencing net
operating losses and redemptions utilized as distributions for federal income
tax purposes during the fiscal year ended October 31, 1999. 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 costs have been deferred
and are being amortized ratably over a period of sixty months from the date the
Fund commenced investment operations.
- --------------------------------------------------------------------------------
B-53
<PAGE>
Notes to Financial Statements PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
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. Pursuant to a subadvisory agreement
between PIFM and 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 to 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 Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, Class B,
Class C and Class Z shares of the Fund. The Fund compensates PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PIMS as distributor
for the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were 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 year ended October 31, 1999.
PIMS has advised the Fund that it received approximately $296,200 and $98,000 in
front-end sales charges resulting from sales of Class A shares and Class C
shares, respectively, during the year ended October 31, 1999. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended October 31, 1999, it received
approximately $268,600 and $4,800 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America ('Prudential').
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the year ended October
31, 1999. The purpose of the agreements is to serve as an alternative source of
funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended October 31, 1999, the
Fund incurred fees of approximately $280,000 for the services of PMFS. As of
October 31, 1999, approximately $33,000 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.
For the year ended October 31, 1999, Prudential Securities Incorporated, which
is an indirect, wholly owned subsidiary of Prudential, earned approximately
$35,000 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 year ended October 31, 1999 were $380,240,384 and $293,370,694,
respectively.
The cost basis of investments for federal income tax purposes at October 31,
1999 was $245,386,673 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $76,470,439 (gross unrealized
appreciation--$83,888,816; gross unrealized depreciation--$7,418,377).
- ------------------------------------------------------------
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
- --------------------------------------------------------------------------------
B-54
<PAGE>
Notes to Financial Statements PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
October 31, 1999, the Fund had a 2.35% undivided interest in the repurchase
agreements in the joint account. The undivided interest for the Fund represented
$22,202,000 in principal amount. As of such date, each repurchase agreement in
the joint account and the value of the collateral therefore were as follows:
Bear, Stearns & Co., Inc., 5.23%, in the principal amount of $250,000,000,
repurchase price $250,108,958, due 11/1/99. The value of the collateral
including accrued interest was $255,352,721.
Goldman, Sachs & Co., 5.18%, in the principal amount of $194,830,000, repurchase
price $194,914,102, due 11/1/99. The value of the collateral including accrued
interest was $198,727,175.
Morgan (J.P.) Securities, Inc., 5.22%, in the principal amount of $250,000,000,
repurchase price $250,108,750, due 11/1/99. The value of the collateral
including accrued interest was $255,000,115.
Salomon Smith Barney, Inc., 5.22%, in the principal amount of $250,000,000,
repurchase price $250,108,750, due 11/1/99. The value of the collateral
including accrued interest was $255,452,608.
- ------------------------------------------------------------
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. Prior to November 2, 1998, Class C shares
were sold with a contingent deferred sales charge of 1% during the first year.
Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
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 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended October 31, 1999:
Shares sold.......................... 4,765,399 $ 81,090,986
Shares issued in reinvestment of
distributions...................... 67,007 844,294
Shares reacquired.................... (3,244,391) (55,188,028)
---------- ------------
Net increase in shares outstanding
before conversion.................. 1,588,015 26,747,252
Shares issued upon conversion from
Class B............................ 198,946 3,220,362
---------- ------------
Net increase in shares outstanding... 1,786,961 $ 29,967,614
---------- ------------
---------- ------------
Year ended October 31, 1998:
Shares sold.......................... 1,456,524 $ 18,249,777
Shares issued in reinvestment of
distributions...................... 50,213 576,443
Shares reacquired.................... (1,662,596) (20,468,264)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (155,859) (1,642,044)
Shares issued upon conversion from
Class B............................ 56,954 708,635
---------- ------------
Net decrease in shares outstanding... (98,905) $ (933,409)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------------------------------------
Year ended October 31, 1999:
Shares sold.......................... 4,299,581 $ 70,231,079
Shares issued in reinvestment of
distributions...................... 177,561 2,201,763
Shares reacquired.................... (1,444,215) (22,492,386)
---------- ------------
Net increase in shares outstanding
before conversion.................. 3,032,927 49,940,456
Shares reacquired upon conversion
into Class A....................... (202,843) (3,220,362)
---------- ------------
Net increase in shares outstanding... 2,830,084 $ 46,720,094
---------- ------------
---------- ------------
Year ended through October 31, 1998:
Shares sold.......................... 1,908,638 $ 23,615,032
Shares issued in reinvestment of
distributions...................... 125,018 1,425,202
Shares reacquired.................... (1,855,918) (22,284,596)
---------- ------------
Net increase in shares outstanding
before conversion.................. 177,738 2,755,638
Shares reacquired upon conversion
into Class A....................... (57,537) (708,635)
---------- ------------
Net increase in shares outstanding... 120,201 $ 2,047,003
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-55
<PAGE>
Notes to Financial Statements PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended October 31, 1999:
Shares sold.......................... 861,899 $ 14,471,091
Shares issued in reinvestment of
distributions...................... 14,915 184,941
Shares reacquired.................... (189,985) (3,042,506)
---------- ------------
Net increase in shares outstanding... 686,829 $ 11,613,526
---------- ------------
---------- ------------
Year ended October 31, 1998:
Shares sold.......................... 254,644 $ 3,157,537
Shares issued in reinvestment of
distributions...................... 10,741 122,442
Shares reacquired.................... (239,687) (2,875,061)
---------- ------------
Net increase in shares outstanding... 25,698 $ 404,918
---------- ------------
---------- ------------
<CAPTION>
Class Z
- -------------------------------------
Year ended October 31, 1999:
Shares sold.......................... 967,643 $ 16,462,871
Shares issued in reinvestment of
distributions...................... 5,036 63,710
Shares reacquired.................... (188,018) (3,102,616)
---------- ------------
Net increase in shares outstanding... 784,661 $ 13,423,965
---------- ------------
---------- ------------
Year ended October 31, 1998:
Shares sold.......................... 190,511 $ 2,433,207
Shares issued in reinvestment of
distributions...................... 935 10,738
Shares reacquired.................... (36,134) (437,608)
---------- ------------
Net increase in shares outstanding... 155,312 $ 2,006,337
---------- ------------
---------- ------------
</TABLE>
- ------------------------------------------------------------
Note 7. Distributions
On November 17, 1999 the Board of Directors of the Fund declared the following
distributions per share, payable on November 23, 1999 to shareholders of record
on November 18, 1999.
<TABLE>
<CAPTION>
Class Class B Class
A and C Z
----- ------- -----
<S> <C> <C> <C>
Short-Term Capital Gains............... $1.07 $1.07 $1.07
Long-Term Capital Gains................ .56 .56 .56
</TABLE>
- --------------------------------------------------------------------------------
B-56
<PAGE>
Financial Highlights PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------- -----------
December 31,
1996(a) Year Ended
Year Ended October 31, Through October 31,
--------------------------- October 31, -----------
1999(d) 1998 1997 1999(d)
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 12.01 $ 11.92 $ 10.00 $ 11.83
----------- ----------- ------ -----------
Income from investment operations
Net investment loss.................................... (.13) (.11) (.08) (.24)
Net realized and unrealized gain on investment
transactions........................................ 7.61 .41 2.00 7.46
----------- ----------- ------ -----------
Total from investment operations.................... 7.48 .30 1.92 7.22
----------- ----------- ------ -----------
Less distributions
Distributions from net realized gains.................. (.33) (.21) -- (.33)
----------- ----------- ------ -----------
Net asset value, end of period......................... $ 19.16 $ 12.01 $ 11.92 $ 18.72
----------- ----------- ------ -----------
----------- ----------- ------ -----------
TOTAL RETURN(c):....................................... 63.65% 2.63% 19.20% 62.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $85,595 $32,183 $ 33,124 $ 184,955
Average net assets (000)............................... $52,984 $33,831 $ 28,141 $ 127,249
Ratios to average net assets:
Expenses, including distribution fees............... 1.22% 1.25% 1.46%(b) 1.97%
Expenses, excluding distribution fees............... .97% 1.00% 1.21%(b) .97%
Net investment loss................................. (.80)% (.88)% (.92)%(b) (1.55)%
Portfolio turnover rate................................ 153% 177% 107% 153%
<CAPTION>
December 31,
1996(a)
Through
October 31,
1998 1997
----------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 11.85 $ 10.00
----------- ------
Income from investment operations
Net investment loss.................................... (.20) (.14)
Net realized and unrealized gain on investment
transactions........................................ .39 1.99
----------- ------
Total from investment operations.................... .19 1.85
----------- ------
Less distributions
Distributions from net realized gains.................. (.21) --
----------- ------
Net asset value, end of period......................... $ 11.83 $ 11.85
----------- ------
----------- ------
TOTAL RETURN(c):....................................... 1.71% 18.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $83,407 $ 82,070
Average net assets (000)............................... $86,713 $ 67,420
Ratios to average net assets:
Expenses, including distribution fees............... 2.00% 2.21%(b)
Expenses, excluding distribution fees............... 1.00% 1.21%(b)
Net investment loss................................. (1.63)% (1.67)%(b)
Portfolio turnover rate................................ 177% 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.
(d) Based on weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<PAGE>
Financial Highlights PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------- -----------
December 31,
1996(a) Year Ended
Year Ended October 31, Through October 31,
--------------------------- October 31, -----------
1999(d) 1998 1997 1999(d)
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 11.83 $ 11.85 $10.00 $ 12.06
----------- ----- ----- -----------
Income from investment operations
Net investment loss.................................... (.24) (.20) (.14) (.09)
Net realized and unrealized gain on investment
transactions........................................ 7.46 .39 1.99 7.64
----------- ----- ----- -----------
Total from investment operations.................... 7.22 .19 1.85 7.55
----------- ----- ----- -----------
Less distributions
Distributions from net realized gains on investment
transactions........................................ (.33) (.21) -- (.33)
----------- ----- ----- -----------
Net asset value, end of period......................... $ 18.72 $ 11.83 $11.85 $ 19.28
----------- ----- ----- -----------
----------- ----- ----- -----------
TOTAL RETURN(c):....................................... 62.39% 1.71% 18.50% 63.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $23,578 $ 6,774 $6,477 $19,029
Average net assets (000)............................... $12,380 $ 6,949 $5,526 $ 7,796
Ratios to average net assets:
Expenses, including distribution fees............... 1.97% 2.00% 2.21%(b) .97%
Expenses, excluding distribution fees............... .97% 1.00% 1.21%(b) .97%
Net investment loss................................. (1.56)% (1.63)% (1.69)%(b) (.56)%
Portfolio turnover rate................................ 153% 177% 107% 153%
<CAPTION>
December 31,
1996(a)
Through
October 31,
1998 1997
----------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 11.93 $10.00
----- -----
Income from investment operations
Net investment loss.................................... (.04) (.03)
Net realized and unrealized gain on investment
transactions........................................ .38 1.96
----- -----
Total from investment operations.................... .34 1.93
----- -----
Less distributions
Distributions from net realized gains on investment
transactions........................................ (.21) --
----- -----
Net asset value, end of period......................... $ 12.06 $11.93
----- -----
----- -----
TOTAL RETURN(c):....................................... 2.97% 19.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 2,439 $ 561
Average net assets (000)............................... $ 1,283 $ 261
Ratios to average net assets:
Expenses, including distribution fees............... 1.00% 1.21%(b)
Expenses, excluding distribution fees............... 1.00% 1.21%(b)
Net investment loss................................. (.63)% (.73)%(b)
Portfolio turnover rate................................ 177% 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.
(d) Based on weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
<PAGE>
Report of Independent Accountants PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Emerging Growth Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Emerging Growth Fund,
Inc. (the 'Fund') at October 31, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the two years in the
period then ended and for the period December 31, 1996 (commencement of
operations) through October 31, 1997, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 20, 1999
- --------------------------------------------------------------------------------
B-59
<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 DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE OF $1.00 INVESTED ON
<S> <C> <C> <C> <C> <C>
1/1/1926 through 12/31/1999
Small Stocks Common Stocks Long-Term Bonds Treasury Bills Inflation
1926
1936
1946
1956
1966
1976
1986
1999 $6,640.79 $2,845.63 $40.22 $15.64 $9.40
</TABLE>
Source: Ibbotson Associates. 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 400 Mid-Cap Index and the S&P 500 Stock Index on December 31, 1984
with an ending value on December 31, 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
12/31/99
S&P 500: $13,430
S&P Midcap 400: $12,492
Source: Lipper Inc. Past performance is not indicative of future results. 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 S&P 400
Mid-Cap Index consists of 400 domestic stocks chosen for market size, 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 S&P 500 Stock Index
is 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
indexes.
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 1989
through 1999. 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 "Risk/Return Summary--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>
YEAR 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)%
- -----------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86%
- -----------------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE
CORPORATE BONDS(3) 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)%
- -----------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD
BONDS(4) 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39%
- -----------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (6.07)%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4 7.46
</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. Source: Lipper Inc.
(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 SMITH BARNEY 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, 1985 through December 31, 1999. It does not represent
the performance of any Prudential Mutual Fund.
Average Annual Total Returns of Major World Stock Markets
(12/31/85-12/31/99)(in U.S. dollars)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
UK 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
</TABLE>
Source: Morgan Stanley Capital International (MSCI), and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes 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 indexes.
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
Capital Appreciation only $474,094
Capital Appreciation $159,597
and Reinvesting Dividends
Source: Lipper Inc. 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 Composite Stock Price 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
indexes.
II-4
<PAGE>
WORLD STOCK MARKET CAPITALIZATION BY REGION
World Total: $20.7 Trillion
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 2.1%
Europe 32.5%
U.S. 49.0%
Pacific Basin 16.4%
</TABLE>
Source: Morgan Stanley Capital International, December 31, 1999. 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 (1926-1999)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1926
1936
1946
1956
1966
1996
1999
- -------------------------------------------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1999. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
II-5
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or 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(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 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 INSTITUTIONAL INVESTOR, July 1998, Prudential
was ranked eighth in terms of total assets under management as of December 31,
1997.
REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers with over 1,400 offices around the
United States.(2)
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 September 30, 1999, Prudential Investments Fund Management was the
20(th) 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 LLC as one of the subadvisers
to Prudential Diversified Funds, Prudential 20/20 Focus Fund, Prudential Sector
Funds, Inc., The Prudential Series Funds, Inc. and 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 and Target Funds.
(2)As of December 31, 1996.
III-1
<PAGE>
EQUITY FUNDS. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates LLC, a
premier institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the
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. Investment grade bond analysts monitor the financial
viability of 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 billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
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.
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, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(4)
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 and financial planning
areas.
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.
- ---------------
(3)As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
(4)As of December 31, 1998.
III-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment.(2)
(3) Articles Supplementary.(4)
(b) Amended By-Laws.*
(c) Instruments defining rights of shareholders.(2)
(d) (1) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.(3)
(2) Amended and Restated Subadvisory Agreement between Prudential
Investments Fund Management LLC and The Prudential Investment
Corporation.*
(e) (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.(3)
(2) Selected Dealer Agreement.(3)
(g) (1) Custodian Contract between the Registrant and State Street Bank and
Trust Company.(2)
(2) Amendment to Custodian Contract.*
(h) (1)Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.(2)
(2) Amendment to Transfer Agency Agreement.*
(i) Opinion and Consent of Counsel.*
(j) Consent of Independent Accountants.*
(m) (1) Amended and Restated Distribution and Service Plan for Class A
Shares.(3)
(2) Amended and Restated Distribution and Service Plan for Class B
Shares.(3)
(3) Amended and Restated Distribution and Service Plan for Class C
Shares.(3)
(o) Amended Rule 18f-3 Plan.(3)
- ------------------------
(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 Registrant's Post-Effective Amendment No. 3
to its Registration Statement on Form N-1A filed on or about October 30,
1998 (File Nos. 333-11785 and 811-07811).
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 5
to its Registration Statement on Form N-1A filed on December 31, 1998
(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
C-1
<PAGE>
may be indemnified against liabilities in connection with the Registrant,
subject to the same exceptions. Section 2-418 of the Maryland General
Corporation Law permits indemnification of directors who acted in good faith and
reasonably believed that the conduct was in the best interests of the
Registrant. As permitted by Section 17(i) of the 1940 Act, pursuant to
Section 10 of the Distribution Agreement (Exhibit (e)(1) to the Registration
Statement), the 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 OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
David R. Odenath, Jr. Officer in Charge, President, Chief Officer in Charge, President, Chief Executive
Executive Officer and Chief Officer and Chief Operating Officer, PIFM;
Operating Officer Senior Vice President, The Prudential
Insurance Company of America (Prudential)
Robert F. Gunia Executive Vice President and Chief Executive Vice President and Chief
Administrative Officer Administrative Officer, PIFM; Vice President,
Prudential; President, Prudential Investment
Management Services LLC (PIMS)
William V. Healey Executive Vice President, Chief Executive Vice President, Chief Legal Officer
Legal Officer and Secretary and Secretary, PIFM; Vice President and
Associate General Counsel, Prudential; Senior
Vice President, Chief Legal Officer and
Secretary, PIMS
Brian W. Henderson Executive Vice President Executive Vice President, PIFM; Senior Vice
President and Chief Operating Officer, PIMS
Stephen Pelletier Executive Vice President Executive Vice President, PIFM
Judy A. Rice Executive Vice President Executive Vice President, PIFM
Lynn M. Waldvogel Executive Vice President 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.
C-3
<PAGE>
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 Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Jeffrey Hiller Chief Compliance Officer Chief Compliance Officer, Prudential
Global Asset Management
John R. Strangfeld, Jr. Chairman of the Board, President, President of Prudential Global Asset
Chief Executive Officer and Management Group of Prudential;
Director Senior Vice President, Prudential;
Chairman of the Board, President,
Chief Executive Officer and
Director, PIC
Bernard Winograd Senior Vice President and Director Chief Executive Officer, Prudential
Real Estate Investors; Senior Vice
President and Director, PIC
</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, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Distressed Securities Fund, Inc., Prudential Diversified Bond Fund, Inc.,
Prudential Diversified Funds, Prudential Emerging Growth Fund, Inc., Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund,
Inc., Prudential Global Genesis Fund, Inc., Prudential Global Total Return 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 International Bond Fund, Inc., Prudential Mid-Cap
Value Fund, Prudential MoneyMart Assets, 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 Sector Funds, Inc.,
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, Inc.,
Prudential Tax-Managed Funds, Prudential World Fund, Inc., The Prudential
Investment Portfolios, Inc., Target Funds 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>
Margaret Deverell Vice President and Chief Financial Officer None
Robert F. Gunia President Vice President and Director
Kevin Frawley Senior Vice President and Compliance None
213 Washington Street Officer
Newark, NJ 07102
William V. Healey Senior Vice President, Secretary and Chief None
Legal Officer
Brian W. Henderson Senior Vice President and Officer None
John R. Strangfeld, Jr. Advisory Board Member President and Director
</TABLE>
- ------------------------
(1) The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise indicated.
C-4
<PAGE>
(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 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 caption "How the Fund is Managed" 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 certifies that it meets all of the requirements for
effectiveness of this Post-Effective Amendment to the Registration Statement
pursuant to Rule 485(b) under the Securities Act and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, duly authorized, in the City of Newark and State of
New Jersey, on the 18th day of January, 2000.
<TABLE>
<S> <C> <C>
PRUDENTIAL EMERGING GROWTH FUND, INC.
By /s/ JOHN R. STRANGFELD, JR
----------------------------------------------
John R. Strangfeld, Jr.
PRESIDENT
</TABLE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DELAYNE DEDRICK GOLD
------------------------------------------------ Director January 18, 2000
Delayne Dedrick Gold
/s/ ROBERT F. GUNIA
------------------------------------------------ Director January 18, 2000
Robert F. Gunia
/s/ DOUGLAS H. MCCORKINDALE
------------------------------------------------ Director January 18, 2000
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY
------------------------------------------------ Director January 18, 2000
Thomas T. Mooney
/s/ STEPHEN P. MUNN
------------------------------------------------ Director January 18, 2000
Stephen P. Munn
/s/ DAVID R. ODENATH, JR.
------------------------------------------------ Director January 18, 2000
David R. Odenath, Jr.
/s/ RICHARD A. REDEKER
------------------------------------------------ Director January 18, 2000
Richard A. Redeker
/s/ ROBIN B. SMITH
------------------------------------------------ Director January 18, 2000
Robin B. Smith
/s/ JOHN R. STRANGFELD, JR.
------------------------------------------------ President and Director January 18, 2000
John R. Strangfeld, Jr.
/s/ LOUIS A. WEIL, III
------------------------------------------------ Director January 18, 2000
Louis A. Weil, III
/s/ CLAY T. WHITEHEAD
------------------------------------------------ Director January 18, 2000
Clay T. Whitehead
/s/ GRACE C. TORRES
------------------------------------------------ Treasurer and Principal Financial and January 18, 2000
Grace C. Torres Accounting Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment.(2)
(3) Articles Supplementary.(4)
(b) Amended By-Laws.*
(c) Instruments defining rights of shareholders.(2)
(d) (1) Management Agreement between the Registrant and
Prudential Mutual Fund Management, Inc.(3)
(2) Amended and Restated Subadvisory Agreement between
Prudential Investments Fund Management LLC and The
Prudential Investment Corporation.*
(e) (1) Distribution Agreement between the Registrant and
Prudential Investment Management Services LLC.(3)
(2) Selected Dealer Agreement.(3)
(g) (1) Custodian Contract between the Registrant and State
Street Bank and Trust Company.(2)
(2) Amendment to Custodian Contract.*
(h) (1) Transfer Agency and Service Agreement between the
Registrant and Prudential Mutual Fund Services, Inc.(2)
(2) Amendment to Transfer Agency Agreement.*
(i) Opinion and Consent of Counsel.*
(j) Consent of Independent Accountants.*
(m) (1) Amended and Restated Distribution and Service Plan for
Class A Shares.(3)
(2) Amended and Restated Distribution and Service Plan for
Class B Shares.(3)
(3) Amended and Restated Distribution and Service Plan for
Class C Shares.(3)
(o) Amended Rule 18f-3 Plan.(3)
</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 Registrant's Post-Effective Amendment No. 3
to its Registration Statement on Form N-1A filed on or about October 30,
1998 (File Nos. 333-11785 and 811-07811).
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 5
to its Registration Statement on Form N-1A filed on December 31, 1998
(File Nos. 333-11785 and 811-07811).
* Filed herewith.
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
By-Laws
ARTICLE I.
STOCKHOLDERS
Section 1. PLACE OF MEETING. All meetings of the stockholders shall be held
at the principal office of the Corporation in the State of Maryland or at such
other place within the United States as may from time to time be designated by
the Board of Directors and stated in the notice of such meeting.
Section 2. ANNUAL MEETINGS. The annual meeting of the stockholders of the
Corporation shall be held on a date and at such hour as may from time to time be
designated by the Board of Directors and stated in the notice of such meeting,
within the month ending four months after the end of the Corporation's fiscal
year, for the transaction of such business as may properly be brought before the
meeting; PROVIDED, however, that an annual meeting shall not be required to be
held in any year in which the election of directors is not required to be acted
on by stockholders under the Investment Company Act of 1940.
Section 3. MEETINGS. Meetings of the stockholders for any purpose or
purposes, including for purposes of voting on the removal of one or more
Directors, may be called by the Chairman of the Board, the President or a
majority of the Board of Directors, and shall be called by the Secretary upon
receipt of the request in writing signed by stockholders holding not less than
10% of the common stock issued and outstanding and entitled to vote thereat.
Such request shall state the purpose or purposes of the proposed
<PAGE>
meeting. The Secretary shall inform such stockholders of the reasonably
estimated costs of preparing and mailing such notice of meeting and upon payment
to the Corporation of such costs, the Secretary shall give notice stating the
purpose or purposes of the meeting as required in this Article and by-law to all
stockholders entitled to notice of such meeting. No meeting need be called upon
the request of the holders of shares entitled to cast less than a majority of
all votes entitled to be cast at such meeting to consider any matter which is
substantially the same as a matter voted upon at any meeting of stockholders
held during the preceding twelve months.
Section 4. NOTICE OF MEETINGS OF STOCKHOLDERS. Not less than ten days' and
not more than ninety days' written or printed notice of every meeting of
stockholders, stating the time and place thereof and the general nature of the
business proposed to be transacted thereat, shall be given to each stockholder
entitled to vote thereat by leaving the same with such stockholder or at such
stockholder's residence or usual place of business or by mailing it, postage
prepaid, and addressed to such stockholder at such stockholder's address as it
appears upon the books of the Corporation. If mailed, notice shall be deemed to
be given when deposited in the United States mail addressed to the stockholder
as aforesaid.
No notice of the time, place or purpose of any meeting of stockholders need
be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
2
<PAGE>
Section 5. RECORD DATES. The Board of Directors may fix, in advance, a date
not exceeding ninety days preceding the date of any meeting of stockholders, any
dividend payment date or any date for the allotment of rights, as a record date
for the determination of the stockholders entitled to notice of and to vote at
such meeting or entitled to receive such dividends or rights, as the case may
be; and only stockholders of record on such date shall be entitled to notice of
and to vote at such meeting or to receive such dividends or rights, as the case
may be. In the case of a meeting of stockholders, such date shall not be less
than ten days prior to the date fixed for such meeting.
Section 6. QUORUM, ADJOURNMENT OF MEETINGS. The presence in person or by
proxy of the holders of record of one-third of the shares of the common stock of
the Corporation issued and outstanding and entitled to vote thereat shall
constitute a quorum at all meetings of the stockholders except as otherwise
provided in the Articles of Incorporation. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the holders of a
majority of the stock present in person or by proxy shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until stockholders owning the requisite amount of stock entitled to
vote at such meeting shall be present. At such adjourned meeting at which
stockholders owning the requisite amount of stock entitled to vote thereat shall
be represented, any business may be transacted which might have been transacted
at the meeting as originally notified.
Section 7. VOTING AND INSPECTORS. At all meetings, stockholders of record
entitled to vote thereat shall have one vote for each share of common stock
3
<PAGE>
standing in his/her name on the books of the Corporation (and such
stockholders of record holding fractional shares, if any, shall have
proportionate voting rights) on the date for the determination of
stockholders entitled to vote at such meeting, either in person or by proxy.
A stockholder may sign a writing authorizing another person to act as proxy.
Signing may be accomplished by the stockholder or the stockholder's
authorized agent signing the writing or causing the stockholder's signature
to be affixed to the writing by any reasonable means, including facsimile
signature. A stockholder may authorize another person to act as proxy by
transmitting, or authorizing the transmission of, a telegram, cablegram,
datagram, or other means of electronic transmission to the person authorized
to act as proxy or to a proxy solicitation firm, proxy support service
organization, or other person authorized by the person who will act as proxy
to receive the transmission.
All questions shall be decided by a majority of the votes cast and all
elections of directors shall be decided by a plurality of the votes cast at a
duly constituted meeting, except as otherwise provided by statute or by the
Articles of Incorporation or by these By-Laws.
At any election of directors, the Chairman of the meeting may, and upon the
request of the holders of ten percent (10%) of the stock entitled to vote at
such election shall, appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of director shall be appointed such
inspector.
Section 8. CONDUCT OF STOCKHOLDERS' MEETINGS. The meetings of the
stockholders shall be presided over by the Chairman of the Board, or if he or
she is not present, by the President, or if he or she is not present, by a
Vice-President, or if none of them is present, by a Chairman to be elected at
4
<PAGE>
the meeting. The Secretary of the Corporation, if present, shall act as a
Secretary of such meetings, or if he or she is not present, an Assistant
Secretary shall so act; if neither the Secretary nor the Assistant Secretary is
present, then the meeting shall elect its Secretary.
Section 9. CONCERNING VALIDITY OF PROXIES, BALLOTS, ETC. At every meeting
of the stockholders, all proxies shall be received and taken in charge of and
all ballots shall be received and canvassed by the Secretary of the meeting, who
shall decide all questions concerning the qualification of voters, the validity
of the proxies and the acceptance or rejection of votes, unless inspectors of
election shall have been appointed by the Chairman of the meeting, in which
event such inspectors of election shall decide all such questions.
ARTICLE II.
BOARD OF DIRECTORS
Section 1. NUMBER AND TENURE OF OFFICE. The business and affairs of the
Corporation shall be conducted and managed by a Board of Directors of not less
than three nor more than fifteen directors, as may be determined from time to
time by vote of a majority of the directors then in office, provided that if
there is no stock outstanding the number of directors may be less than three but
not less than one. Directors need not be stockholders.
Section 2. VACANCIES. In case of any vacancy in the Board of Directors
through death, resignation or other cause, other than an increase in the number
5
<PAGE>
of directors, a majority of the remaining directors, although a majority is less
than a quorum, by an affirmative vote, may elect a successor to hold office
until the next meeting of stockholders or until his or her successor is chosen
and qualifies.
Section 3. INCREASE OR DECREASE IN NUMBER OF DIRECTORS. The Board of
Directors, by the vote of a majority of the entire Board, may increase the
number of directors and may elect directors to fill the vacancies created by any
such increase in the number of directors until the next meeting of stockholders
or until their successors are duly chosen and qualified. The Board of Directors,
by the vote of a majority of the entire Board, may likewise decrease the number
of directors to a number not less than three.
Section 4. PLACE OF MEETING. The directors may hold their meetings, have
one or more offices, and keep the books of the Corporation, outside the State of
Maryland, at any office or offices of the Corporation or at any other place as
they may from time to time by resolution determine, or in the case of meetings,
as they may from time to time by resolution determine or as shall be specified
or fixed in the respective notices or waivers of notice thereof.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such time and on such notice as the directors may from time to
time determine.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be held from time to time upon call of the Chairman of the Board, the
6
<PAGE>
President, the Secretary or two or more of the directors, by oral or telegraphic
or written notice duly served on or sent or mailed to each director not less
than one day before such meeting. No notice need be given to any director who
attends in person or to any director who, in writing executed and filed with the
records of the meeting either before or after the holding thereof, waives such
notice. Such notice or waiver of notice need not state the purpose or purposes
of such meeting.
Section 7. QUORUM. One-third of the directors then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall have been obtained.
The act of the majority of the directors present at any meeting at which there
is a quorum shall be the act of the directors, except as may be otherwise
specifically provided by statute or by the Articles of Incorporation or by these
By-Laws.
Section 8. OPERATING COMMITTEE. The Board of Directors may, by the
affirmative vote of a majority of the whole Board, appoint from the directors
an Operating Committee to consist of such number of directors (not less than
three) as the Board may from time to time determine. The Chairman of the
Committee shall be elected by the Board of Directors. The Board of Directors
by such
7
<PAGE>
affirmative vote shall have power at any time to change the members of such
Committee and may fill vacancies in the Committee by election from the
directors. When the Board of Directors is not in session, to the extent
permitted by law, the Operating Committee shall have and may exercise any or all
of the powers of the Board of Directors in the management of the business and
affairs of the Corporation. The Operating Committee may fix its own rules of
procedure, and may meet when and as provided by such rules or by resolution of
the Board of Directors, but in every case the presence of a majority shall be
necessary to constitute a quorum. During the absence of a member of the
Operating Committee, the remaining members may appoint a member of the Board of
Directors to act in his or her place.
Section 9. OTHER COMMITTEES. The Board of Directors, by the affirmative
vote of a majority of the whole Board, may appoint from the directors other
committees which shall in each case consist of such number of directors (not
less than one) and shall have and may exercise such powers as the Board may
determine in the resolution appointing them. A majority of all the members of
any such committee may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to change the members and powers of any
such committee, to fill vacancies and to discharge any such committee.
Section 10. TELEPHONE MEETINGS. Members of the Board of Directors or a
committee of the Board of Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
8
<PAGE>
participating in the meeting can hear each other at the same time. Participation
in a meeting by these means constitutes presence in person at the meeting unless
otherwise provided by the Investment Company Act of 1940.
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken at any meeting of the Board of Directors or any committee thereof
may be taken without a meeting, if a written consent to such action is signed
by all members of the Board or of such committee, as the case may be, and
such written consent is filed with the minutes of the proceedings of the
Board or such committee, unless otherwise provided by the Investment Company
Act of 1940.
Section 12. COMPENSATION OF DIRECTORS. No director shall receive any stated
salary or fees from the Corporation for his or her services as such if such
director is, other than by reason of being such director, an interested person
(as such term is defined by the Investment Company Act of 1940) of the
Corporation or of its investment adviser, administrator or principal
underwriter. Except as provided in the preceding sentence, directors shall be
entitled to receive such compensation from the Corporation for their services as
may from time to time be voted by the Board of Directors.
Section 13. REMOVAL OF DIRECTORS. No director shall continue to hold office
after the holders of record of not less than two-thirds of the Corporation's
outstanding common stock of all series have declared that that director be
removed from office either by declaration in writing filed with the
Corporation's secretary or by votes cast in person or by proxy at a
9
<PAGE>
meeting called for the purpose. The directors shall promptly call a meeting of
stockholders for the purpose of voting upon the question of removal of any
director or directors when requested in writing to do so by the record holders
of not less than 10 percent of the Corporation's outstanding common stock of all
series.
ARTICLE III.
OFFICERS
Section 1. EXECUTIVE OFFICERS. The executive officers of the Corporation
shall be chosen by the Board of Directors. These may include a Chairman of
the Board of Directors and shall include a President, one or more
Vice-Presidents (the number thereof to be determined by the Board of
Directors), a Secretary and a Treasurer. The Board of Directors or the
Operating Committee may also in its discretion appoint Assistant Secretaries,
Assistant Treasurers and other officers, agents and employees, who shall have
such authority and perform such duties as the Board or the Operating
Committee may determine. The Board of Directors may fill any vacancy which
may occur in any office. Any two offices, except those of President and
Vice-President, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law or these By-Laws to be executed, acknowledged
or verified by two or more officers.
Section 2. TERM OF OFFICE. The term of office of all officers shall be one
year and until their respective successors are chosen and qualified. Any
10
<PAGE>
officer may be removed from office at any time with or without cause by the vote
of a majority of the whole Board of Directors.
Section 3. POWERS AND DUTIES. The officers of the Corporation shall have
such powers and duties as generally pertain to their respective offices, as well
as such powers and duties as may from time to time be conferred by the Board of
Directors or the Operating Committee.
ARTICLE IV.
CAPITAL STOCK
Section 1. CERTIFICATES FOR SHARES. Each stockholder of the Corporation
shall be entitled to a certificate or certificates for the full shares of stock
of the Corporation owned by him or her in such form as the Board from time to
time prescribe.
Section 2. TRANSFER OF SHARES. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his or her duly authorized attorney or legal representative, upon surrender
and cancellation of certificates, if any, for the same number of shares, duly
endorsed or accompanied by proper instruments of assignment and transfer, with
such proof of the authenticity of the signature as the Corporation or its agents
may reasonably require; in the case of shares not represented by certificates,
the same or similar requirements may be imposed by the Board of Directors.
Section 3. STOCK LEDGERS. The stock ledgers of the Corporation, containing
11
<PAGE>
the names and addresses of the stockholders and the number of shares held by
them respectively, shall be kept at the principal office of the Corporation or,
if the Corporation employs a Transfer Agent, at the office of the Transfer Agent
of the Corporation.
Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors
or the Operating Committee may determine the conditions upon which a new
certificate of stock of the Corporation of any class may be issued in place of a
certificate which is alleged to have been lost, stolen or destroyed; and may, in
its discretion, require the owner of such certificate or such owner's legal
representative to give bond, with sufficient surety, to the Corporation and each
Transfer Agent, if any, to indemnify it and each such Transfer Agent against any
and all loss or claims which may arise by reason of the issue of a new
certificate in the place of the one so lost, stolen or destroyed.
ARTICLE V.
CORPORATE SEAL
The Board of Directors may provide for a suitable corporate seal, in such
form and bearing such inscriptions as it may determine.
ARTICLE VI.
FISCAL YEAR
The fiscal year of the Corporation shall be fixed by the Board of
Directors.
ARTICLE VII.
INDEMNIFICATION
12
<PAGE>
Directors, officers, employees and agents of the Corporation shall not be
liable to the Corporation, any stockholder, officer, director, employee or other
person for any action or failure to act except for willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office. The Corporation shall indemnify directors, officers,
employees and agents of the Corporation against judgments, fines, settlements
and expenses to the fullest extent authorized and in the manner permitted by
applicable federal and state law. The Corporation may purchase insurance to
protect itself and its directors, officers, employees and agents against
judgments, fines, settlements and expenses to the fullest extent authorized and
in the manner permitted by applicable federal and state law. Nothing contained
in this Article VII shall be construed to indemnify directors, officers,
employees and agents of the Corporation against, nor to permit the Corporation
to purchase insurance that purports to protect against, any liability to the
Corporation or any stockholder, officer, director, employee, agent or other
person to whom he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
ARTICLE VIII.
CUSTODIAN
Section 1. The Corporation shall have as custodian or custodians one or
more trust companies or banks of good standing, each having a capital,
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surplus and undivided profits aggregating not less than fifty million dollars
($50,000,000), and, to the extent required by the Investment Company Act of
1940, the funds and securities held by the Corporation shall be kept in the
custody of one or more such custodians, provided such custodian or custodians
can be found ready and willing to act, and further provided that the Corporation
may use as subcustodians, for the purpose of holding any foreign securities and
related funds of the Corporation, such foreign banks as the Board of Directors
may approve and as shall be permitted by law.
Section 2. The Corporation shall upon the resignation or inability to serve
of its custodian or upon change of the custodian:
(a) in case of such resignation or inability to serve, use its
best efforts to obtain a successor custodian;
(b) require that the cash and securities owned by the
Corporation be delivered directly to the successor custodian; and
(c) in the event that no successor custodian can be found,
submit to the stockholders before permitting delivery of the cash and
securities owned by the Corporation otherwise than to a successor custodian,
the question whether or not this Corporation shall be liquidated or shall
function without a custodian.
ARTICLE IX.
AMENDMENT OF BY-LAWS
The By-Laws of the Corporation may be altered, amended, added to
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or repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-Laws
by action of the Board of Directors may be altered or repealed by stockholders.
As amended as of November 19, 1999.
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PRUDENTIAL EMERGING GROWTH FUND, INC.
SUBADVISORY AGREEMENT
Agreement made as of this 12th day of October, 1996, and amended and
restated as of January 1, 2000, between Prudential Investments Fund
Management LLC (formerly known as 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 March
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
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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.
(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
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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
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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.
(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.
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(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 31a-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 pay the Subadviser at the annual rate of .30 of
1% of the Fund's average daily net assets for
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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 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
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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.
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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 INVESTMENTS FUND MANAGEMENT LLC
BY /s/ Robert F. Gunia
--------------------
Robert F. Gunia
Executive Vice President
THE PRUDENTIAL INVESTMENT CORPORATION
BY /s/ John R. Strangfeld, Jr.
----------------------------
John R. Strangfeld, Jr.
President
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AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT
This Amendment to the respective Custodian Contract/Agreement is made
as of February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.
WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and
WHEREAS, each Fund and the Custodian desire to amend certain provisions
of the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, each Fund and the Custodian desire to amend and restate
certain other provisions of the Contract relating to the custody of assets of
each of the Funds held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereby agree to
amend the Contract, to add the following new provisions which supersede the
provisions in the existing contracts relating to the custody of assets of the
Funds outside the United States.
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
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"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of
Rule 17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule
17f-5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list
on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the assets of the Funds which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the
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Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign
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Custody Manager which is a foreign securities depository or clearing agency that
is not a Mandatory Securities Depository). The Foreign Custody Manager shall
provide the Board at least annually with information as to the factors used in
such monitoring system. If the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has selected are no
longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder and withdraw the Foreign Assets from such
Eligible Foreign Custodian as soon as reasonably practicable.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO.
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17f-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty (60)
days after receipt by the non-terminating party of such notice.
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The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Funds with
respect to designated countries.
3.10. MOST FAVORED CLIENT.
If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUNDS HELD
OUTSIDE THE UNITED STATES.
4.1 DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, PROVIDED HOWEVER,
that (i) the records of the Custodian with respect to foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign
Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
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4.4.1. DELIVERY OF FOREIGN ASSETS.
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Fund in
accordance with customary market practice in the country where
such foreign securities are held or traded, including, without
limitation: (A) delivery against expectation of receiving
later payment; or (B) in the case of a sale effected through a
Foreign Securities System, in accordance with the rules
governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or otherwise become
payable;
(v) to the issuer thereof, or its agent, for transfer into the
name of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such
Foreign Sub-Custodian) or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with reasonable
market custom; PROVIDED that in any such case the Foreign
Sub-Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from
the Foreign Sub-Custodian's own negligence or willful
misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
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(ix) for delivery as security in connection with any borrowing by
the Funds requiring a pledge of assets by the Funds;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the foreign securities to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper
trust\corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
4.4.2. PAYMENT OF FUND MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where
such foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer)
against expectation of receiving later delivery of such
foreign securities; or (B) in the case of a purchase effected
through a Foreign Securities System, in accordance with the
rules governing the operation of such Foreign Securities
System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees
under this Contract, legal fees, accounting fees, and other
operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign
exchange contracts for the Fund, including transactions
executed with or through the Custodian or its Foreign
Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
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(vi) for payment of part or all of the dividends received in
respect of securities sold short;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper trust\corporate purpose,
and naming the person or persons to whom such payment is to be
made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.
The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:
(i) legal opinions relating to whether local law restricts with
respect to U.S. registered mutual funds (a) access of a fund's
independent public accountants to books and records of a
Foreign Sub-Custodian or Foreign Securities System, (b) a
fund's ability to recover in the event of bankruptcy or
insolvency of a Foreign Sub-Custodian or Foreign Securities
System, (c) a fund's ability to recover in the event of a loss
by a Foreign Sub-Custodian or Foreign Securities System, and
(d) the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;
8
<PAGE>
(ii) summary of information regarding Foreign Securities Systems;
and
(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership
limits, and (f) unique market arrangements.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities, except to the extent that the Fund incurs
loss or damage due to failure of such nominee to meet its standard of care set
forth in the Contract. The Custodian or a Foreign Sub-Custodian shall not be
obligated to accept securities on behalf of a Fund under the terms of this
Contract unless the form of such securities and the manner in which they are
delivered are in accordance with reasonable market practice.
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use
9
<PAGE>
reasonable commercial efforts to facilitate the exercise of voting and other
shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.
4.11. TAX LAW.
Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of the Fund by the tax law
of the United States or of any state or political subdivision thereof. It shall
be the responsibility of each Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of
10
<PAGE>
the Fund by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
4.12. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in
the event of any conflict between the provisions of Articles 3 and 4
hereof, the provisions of Article 3 shall prevail.
11
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
/s/Marc L. Parsons By: /s/Ronald E. Logue
- ------------------ ------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
<PAGE>
Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.
WITNESSED BY:
By: /s/S. Jane Rose By: /s/Grace Torres
--------------- ---------------
Grace Torres
Treasurer
First Financial Fund, Inc.
The High Yield Plus Fund, Inc.
WITNESSED BY:
By: /s/Stephanie L. Bourque By: /s/Arthur J. Brown
----------------------- ------------------
Arthur J. Brown
Secretary
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. Deposito Central de
Valores S.A.
People's The Hongkong and Shanghai --
Republic Banking Corporation Limited,
of China Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
</TABLE>
14
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Costa Rica Banco BCT S.A. --
Croatia Privredna Banka Zagreb d.d --
Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring
Transactions in
Securities in Book-Entry
Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
Iceland Icebank Ltd.
</TABLE>
15
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
India Deutsche Bank AG --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.
Japan The Daiwa Bank, Limited Japan Securities
Depository Center
The Fuji Bank, Limited
Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic The Hongkong and Shanghai Banking
of Korea Corporation Limited
Latvia JSC Hansabank-Latvija --
Lebanon British Bank of the Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
</TABLE>
16
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
The
Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
Portugal Banco Comercial Portugues --
</TABLE>
17
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Romania ING Bank N.V. --
Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Republic Ceskoslovenska Obchodni Banka, A.S. --
Slovenia Bank Austria d.d. Ljubljana --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad
& Tobago Republic Bank Limited --
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
Ottoman Bank
</TABLE>
18
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust Company, --
London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities)
</TABLE>
* The global custody network approved by each fund is set forth below on
Schedules A-1 and A-2.
19
<PAGE>
SCHEDULE A-1
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
Country Funds
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina Mexico Global Utility Fund, Inc.
Australia Morocco Prudential 20/20 Focus Fund
Austria Netherlands Prudential Balanced Fund
Bangladesh/+/ New Zealand Prudential Equity Fund, Inc.
Belgium Norway Prudential Equity Income Fund
Brazil Pakistan Prudential Developing Markets Fund
Canada Peru Prudential Diversified Bond Fund, Inc.
Chile Philippines Prudential Distressed Securities Fund, Inc.
China Poland Prudential Diversified Funds
Columbia Portugal Prudential Emerging Growth Fund, Inc.
Cyprus Russia Prudential Global Genesis Fund, Inc.
Czech Republic Singapore Prudential Global Limited Maturity Fund, Inc.
Denmark Slovak Republic Prudential Index Series Fund
Ecuador South Africa Prudential Intermediate Global Income Fund, Inc.
Egypt Spain Prudential International Bond Fund, Inc.
Finland Sri Lanka Prudential Mid-Cap Value Fund
France Sweden Prudential Natural Resources Fund, Inc.
Germany Switzerland Prudential Pacific Growth Fund, Inc.
Ghana Taiwan Prudential Real Estate Securities Fund
Greece Thailand Prudential Small-Cap Quantum Fund, Inc.
Hong Kong Turkey Prudential Small Company Value Fund, Inc.
Hungary Transnational Prudential Tax-Managed Equity Fund
India United Kingdom Prudential Utility Fund, Inc.
Indonesia Uruguay Prudential World Fund, Inc.
Ireland Venezuela The Prudential Investment Portfolios Fund, Inc.
Israel The Target Portfolio Trust
Italy The Global Total Return Fund, Inc.
Ivory Coast
Japan
Jordan
Kenya
Korea
Lebanon
Malaysia
- ---------------------------------------------------------------------------------------------------------------
+ Countries marked by a dagger have been approved only for The Target Portfolio Trust.
</TABLE>
<PAGE>
SCHEDULE A-2
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
Country Funds
- ----------------------------------------------------------------------------------------------
<S> <C>
United Kingdom Cash Accumulation Trust
Command Government Fund
Command Money Fund
Prudential Government Income Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential High Yield Income Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC
Central de Custodia e de Liquidacao
Financeira de Titulos
Canada The Canadian Depository
for Securities Limited
People's Republic Shanghai Securities Central Clearing
of China and Registration Corporation
Shenzhen Securities Central Clearing
Co., Ltd.
Croatia
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen
(the Danish Securities Center)
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Egypt Misr Company for Clearing, Settlement,
and Central Depository
Finland The Finnish Central Securities
Depository
France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
(Apothetirion Titlon AE)
Hong Kong The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]
India The National Securities Depository Limited
Indonesia Bank Indonesia
Ireland Central Bank of Ireland
Securities Settlement Office
Israel The Tel Aviv Stock Exchange Clearing
House Ltd.
Bank of Israel
Italy Monte Titoli S.p.A.
Banca d'Italia
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System
Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)
Morocco Maroclear
The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand New Zealand Central Securities
Depository Limited
Norway Verdipapirsentralen (the Norwegian
Registry of Securities)
Pakistan Central Depository Company of Pakistan
Limited
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
Romania National Securities Clearing, Settlement and
Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Pte)
Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
South Africa The Central Depository Limited
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
Sri Lanka Central Depository System
(Pvt) Limited
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.
Thailand Thailand Securities Depository
Company Limited
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
Venezuela Central Bank of Venezuela
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE C
MARKET INFORMATION
<TABLE>
<CAPTION>
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
<S> <C>
(Frequency)
THE GUIDE TO CUSTODY IN WORLD MARKETS An overview of safekeeping and
(annually) settlement practices and
procedures in each market in which
State Street Bank and Trust Company
offers custodial services.
GLOBAL CUSTODY NETWORK REVIEW Information relating to the operating
(annually) history and structure of
depositories and subcustodians
located in the markets in which
State Street Bank and Trust Company
offers custodial services,
including transnational
depositories.
GLOBAL LEGAL SURVEY With respect to each market in
(annually) which State Street Bank and Trust
Company offers custodial services,
opinions relating to whether local
law restricts (i) access of a
fund's independent public
accountants to books and records of
a Foreign Sub-Custodian or Foreign
Securities System, (ii) the Fund's
ability to recover in the event of
bankruptcy or insolvency of a
Foreign Sub-Custodian or Foreign
Securities System, (iii) the Fund's
ability to recover in the event of
a loss by a Foreign Sub-Custodian
or Foreign Securities System, and
(iv) the ability of a foreign
investor to convert cash and cash
equivalents to U.S. dollars.
SUBCUSTODIAN AGREEMENTS Copies of the subcustodian
(annually) contracts State Street Bank and
Trust Company has entered into with
each subcustodian in the markets in
which State Street Bank and Trust
Company offers subcustody services
to its US mutual fund clients.
Network Bulletins (weekly): Developments of interest to
investors in the markets in which
State Street Bank and Trust Company
offers custodial services.
Foreign Custody Advisories With respect to markets in which
(as necessary): State Street Bank and Trust Company
offers custodial services which
exhibit special custody risks,
developments which may impact State
Street's ability to deliver
expected levels of service.
</TABLE>
<PAGE>
SCHEDULE D
LIST OF FUNDS, CONTRACTS AND AGREEMENTS
<TABLE>
<CAPTION>
Fund Name Execution Date
- --------- --------------
<S> <C>
Cash Accumulation Trust December 12, 1997
Command Government Fund July 1, 1990
Command Money Fund July 1, 1990
Command Tax-Free Fund July 1, 1990
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)
Prudential 20/20 Focus Fund April 14, 1998
Prudential California Municipal Fund August 1, 1990
Prudential Developing Markets Fund June 1, 1998
Prudential Distressed Securities Fund, Inc. February 8, 1996
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Diversified Funds September 2, 1998
Prudential Emerging Growth Fund, Inc. October 21, 1996
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Limited Maturity Fund, Inc. October 25, 1990
(formerly Prudential Short-Term Global
Income Fund, Inc.)
Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)
Prudential Government Securities Trust July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
Prudential High Yield Total Return Fund, Inc. May 30, 1997
Prudential International Bond Fund, Inc. January 16, 1996
(formerly The Global Government Plus Fund, Inc.)
The Prudential Investment Portfolios Fund, Inc.
(formerly Prudential Jennison Series Fund, Inc.) October 27, 1995
Prudential Mid-Cap Value Fund April 14, 1998
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Prudential MoneyMart Assets, Inc. July 25, 1990
Prudential Mortgage Income Fund, Inc. August 1, 1990
(formerly Prudential GNMA Fund, Inc.)
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990
Prudential National Municipals Fund, Inc. July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Real Estate Securities Fund February 18, 1998
Prudential Small Cap Quantum Fund, Inc. August 1, 1997
Prudential Small Company Value Fund, Inc. July 26, 1990
(formerly Prudential Growth Opportunity Fund, Inc.)
Prudential Special Money Market Fund, Inc. January 12, 1990
Prudential Structured Maturity Fund, Inc. July 25, 1989
Prudential Tax-Free Money Fund, Inc. July 26, 1990
Prudential Utility Fund, Inc. June 6, 1990
Prudential World Fund, Inc. June 7, 1990
(formerly Prudential Global Fund, Inc.)
The Target Portfolio Trust November 9, 1992
Global Utility Fund, Inc. December 21, 1989
Nicholas-Applegate Fund, Inc. April 10, 1987
Prudential Balanced Fund September 4, 1987
Prudential Equity Income Fund January 6, 1987
Prudential Global Genesis Fund, Inc. October 21, 1987
Prudential Institutional Liquidity Portfolio, Inc. November 20, 1987
Prudential Intermediate Global Income Fund, Inc. May 19, 1988
Prudential Municipal Bond Fund August 25, 1987
Prudential Natural Resources Fund, Inc. September 18, 1987
Prudential Tax-Managed Equity Fund December 8, 1998
The Asia Pacific Fund April 24, 1987
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Duff & Phelps Utilities Tax-Free Income Fund, Inc. November 21, 1991
First Financial Fund, Inc. May 1, 1986
The High Yield Income Fund, Inc. November 6, 1987
The High Yield Plus Fund, Inc. March 15, 1988
</TABLE>
<PAGE>
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
Prudential Emerging Growth Fund, Inc. (the "Fund") and Prudential Mutual Fund
Services LLC (successor to Prudential Mutual Fund Services, Inc.)("PMFS") is
entered into as of August 24, 1999.
WHEREAS, the Fund and PMFS have entered into a Transfer Agency and
Service Agreement (the "Agreement") pursuant to which PMFS serves as transfer
agent, dividend disbursing agent and shareholder servicing agent for the Fund;
and
WHEREAS, the Fund and PMFS desire to amend the Agreement to confirm
the Fund's agreement to pay transfer agency account fees and expenses for
beneficial owners holding shares through omnibus accounts maintained by The
Prudential Insurance Company of America, its subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement, and other good and valuable consideration, Article 8 of the Agreement
is amended by adding the following section to the Agreement:
8.04 PMFS may enter into agreements with Prudential or any
subsidiary or affiliate of Prudential whereby PMFS will maintain an
omnibus account and the Fund will reimburse PMFS for amounts paid by PMFS
to Prudential, or such subsidiary or affiliate, in an amount not in
excess of the annual maintenance fee for each beneficial shareholder
account and transactional fees and expenses with respect to such
beneficial shareholder account as if each beneficial shareholder account
were maintained by PMFS on the Fund's records, subject to the fee
schedule attached hereto as Schedule A. Prudential, its subsidiary or
affiliate, as the case may be, shall maintain records relating to each
beneficial shareholder account that underlies the omnibus account
maintained by PMFS.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
PRUDENTIAL EMERGING ATTEST:
GROWTH FUND, INC.
By: /s/ Robert F. Gunia By: /s/ Marguerite E.H. Morrison
--------------------------- ------------------------------
Robert F. Gunia Marguerite E.H. Morrison
Vice President Secretary
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTEST:
By: /s/ Brian W. Henderson By: /s/ William V. Healey
--------------------------- ------------------------------
Brian W. Henderson William V. Healey
President Secretary
<PAGE>
[PIPER MARBURY RUDNICK & WOLFE LLP LOGO]
36 South Charles Street
Baltimore, Maryland 21201-3018
www.piperrudnick.com
PHONE (410) 539-2530
FAX (410) 539-0489
January 14, 2000
Prudential Emerging Growth Fund, Inc.
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Re: REGISTRATION STATEMENT ON FORM N-1A
Ladies and Gentlemen:
We have acted as special Maryland counsel to Prudential Emerging Growth
Fund, Inc. (the "Fund") in connection with the registration by the Fund of up to
2,000,000,000 shares of its Common Stock divided into four classes, designated
Class A, Class B, Class C and Class Z, par value $.001 per share (the "Shares"),
pursuant to a registration statement on Form N-1A, as amended (the "Registration
Statement") under the Securities Act of 1933, as amended.
In this capacity, we have examined the Fund's charter and by-laws, the
proceedings of the Board of Directors of the Fund authorizing the issuance of
the Shares in accordance with the Registration Statement, a good standing
certificate issued by the Maryland State Department of Assessments and Taxation
issued as of a recent date, and such other statutes, certificates, instruments
and documents relating to the Fund and matters of law as we have deemed
necessary to the issuance of this opinion. In such examination, we have assumed,
without independent investigation, the genuineness of all signatures, the
conformity of final documents in all material respects to the versions thereof
submitted to us in draft form, the authenticity of all documents submitted to us
as originals, the conformity with originals of all documents submitted to us as
copies, and the accuracy and completeness of all public records reviewed by us.
As to factual matters, we have relied on an officer's certificate and have not
independently verified the matters stated therein.
<PAGE>
Prudential Emerging Growth Fund, Inc.
January 14, 2000
Page 2
[PIPER MARBURY RUDNICK & WOLFE LLP LOGO]
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Fund has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The Shares to be issued by the Fund pursuant to the Registration
Statement have been duly authorized and, when issued as contemplated in the
Registration Statement in an amount not to exceed the number of Shares
authorized by the charter but unissued, will be validly issued, fully paid and
nonassessable.
Very truly yours,
/s/ Piper Marbury Rudnick & Wolfe LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated December 20, 1999, relating to the financial statements and
financial highlights of Prudential Emerging Growth Fund, Inc., which appears in
such Registration Statement. We also consent to the references to us under the
headings "Investment Advisory and Other Services" and "Financial Highlights" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 14, 2000
