<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998
SECURITIES ACT REGISTRATION NOS. 33-
INVESTMENT COMPANY ACT REGISTRATION NO. 811-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
PRUDENTIAL DIVERSIFIED SERIES
(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) 367-1495
DAVID F. CONNOR, ESQ.
100 MULBERRY STREET
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
STEPHANIE A. DJINIS, ESQ.
KIRKPATRICK & LOCKHART, LLP
1800 MASSACHUSETTS AVE., N.W.
WASHINGTON, D.C. 20036
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<TABLE>
<S> <C>
Title of Securities Being Registered.......... Shares of Beneficial Interest, $.001 par value
per share
</TABLE>
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<PAGE> 2
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
-------------- --------
<S> <C> <C>
PART A
Item 1. Cover Page...................................... Front Cover Page
Item 2. Synopsis........................................ Portfolio Highlights; Trust
Expenses
Item 3. Condensed Financial Information................. Not Applicable
Item 4. General Description of Registrant............... Introducing Prudential Diversified
Series; Description of the
Portfolios; General Information
Item 5. Management of the Fund.......................... Management of the Trust; General
Information
Item 5A. Management's Discussion of Fund Performance..... Not Applicable
Item 6. Capital Stock and Other Securities.............. Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered............ Shareholder Guide
Item 8. Redemption or Repurchase........................ Shareholder Guide
Item 9. Pending Legal Proceedings....................... Not Applicable
PART B
Item 10. Cover Page...................................... Cover Page
Item 11. Table of Contents............................... Table of Contents
Item 12. General Information and History................. Not Applicable
Item 13. Investment Objectives and Policies.............. Additional Investment Information;
Investment Restrictions
Item 14. Management of the Fund.......................... Trustees and Officers; Manager;
Advisers; Distributor
Item 15. Control Persons and Principal Holders of
Securities.................................... Trustees and Officers
Item 16. Investment Advisory and Other Services.......... Manager; Advisers; Distributor;
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants
Item 17. Brokerage Allocation and Other Practices........ Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities.............. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase and Redemption of Shares;
Shareholder Investment Account;
Net Asset Value
Item 20. Tax Status...................................... Taxes, Dividends and Distributions
Item 21. Underwriters.................................... Distributor
Item 22. Calculation of Performance Data................. Performance Information
Item 23. Financial Statements............................ Not Applicable
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PRUDENTIAL DIVERSIFIED SERIES(SM)
Prospectus dated October 1, 1998
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The Prudential Diversified Series(SM) (the "Trust"), is an open-end,
management investment company currently composed of three diversified investment
portfolios (the "Portfolios") with the following investment objectives:
- PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO seeks to provide
current income and a reasonable level of capital appreciation.
- PRUDENTIAL DIVERSIFIED MODERATE GROWTH PORTFOLIO seeks to provide capital
appreciation and a reasonable level of current income.
- PRUDENTIAL DIVERSIFIED AGGRESSIVE GROWTH PORTFOLIO seeks to provide
long-term capital appreciation.
Prudential Investments Fund Management LLP ("PIFM" or the "Manager") is
responsible for the overall management of the Portfolios. Each Portfolio
benefits from discretionary advisory services provided by several highly
regarded sub-advisors (each an "Adviser") identified, retained, supervised and
compensated by PIFM.
The Trust's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Trust that a
prospective investor ought to know before investing. Additional information
about the Trust has been filed with the Securities and Exchange Commission (the
"Commission") in a Statement of Additional Information, dated October 1, 1998,
which information is incorporated herein by reference and is available without
charge upon request to the Trust at the address or telephone number noted above.
The Commission maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference, and
other information regarding the Trust.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
PORTFOLIO HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL DIVERSIFIED SERIES?
Prudential Diversified Series is an open-end management investment company
offering shares in three diversified mutual funds (the "Portfolios"). A mutual
fund pools the resources of investors by selling its shares to the public and
investing the proceeds from such sales in a portfolio of securities designed to
achieve its investment objective.
WHAT ARE THE PORTFOLIOS' INVESTMENT OBJECTIVES?
The Portfolios' investment objectives are as follows:
PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO (THE "CONSERVATIVE
GROWTH PORTFOLIO") SEEKS TO PROVIDE CURRENT INCOME AND A REASONABLE LEVEL OF
CAPITAL APPRECIATION. The Portfolio pursues its objective by investing in a
diversified portfolio of debt obligations and equity securities.
PRUDENTIAL DIVERSIFIED MODERATE GROWTH PORTFOLIO (THE "MODERATE GROWTH
PORTFOLIO") SEEKS TO PROVIDE CAPITAL APPRECIATION AND A REASONABLE LEVEL OF
CURRENT INCOME. The Portfolio pursues its objective by investing in a
diversified portfolio of equity securities and debt obligations.
PRUDENTIAL DIVERSIFIED AGGRESSIVE GROWTH PORTFOLIO (THE "AGGRESSIVE GROWTH
PORTFOLIO") SEEKS TO PROVIDE LONG-TERM CAPITAL APPRECIATION. The Portfolio
pursues its objective by investing in a diversified portfolio of equity
securities.
Each Portfolio includes a mix of asset classes and investment styles
consistent with the objectives, time horizon and risk tolerance of a particular
type of investor. See "Introducing Prudential Diversified Series -- What Are the
Differences Between the Portfolios?"
WHO MANAGES THE PORTFOLIOS?
Prudential Investments Fund Management LLC ("PIFM" or the "Manager") is the
Manager of each Portfolio and is compensated for its services at the annual rate
of .75% of the average daily net assets of each Portfolio.
PIFM has contracted with several highly regarded sub-advisers (the
"Advisers") to manage the assets of each Portfolio. PIFM has selected each
Adviser based on its experience and proven ability to achieve superior
investment results. In selecting the Advisers, PIFM has also considered their
investment philosophies, analytical resources and other factors.
WHAT ARE THE PORTFOLIOS' RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Conservative Growth and Moderate Growth Portfolios may invest up to 35%
of their respective total assets in debt securities rated below "investment
grade." These securities, which are often referred to as "junk bonds," are
regarded as predominantly speculative and generally entail a higher risk of
default than higher quality debt. Each Portfolio may invest a substantial
portion of its assets in the common stock of small and medium-sized companies.
Stock issued by these companies is generally more volatile than stocks of
larger, more established companies. Each of the Conservative Growth and Moderate
Growth Portfolios may invest in debt securities of foreign
2
<PAGE> 5
issuers, and each of the Conservative Growth, Moderate Growth and Aggressive
Growth Portfolios may invest in the stock of foreign issuers. These investments
may include securities of issuers located in emerging market countries. Foreign
securities involve considerations and risks not typically associated with
investments in the securities of U.S. issuers. The risks associated with
investments in foreign securities is generally greater with respect to the
securities of issuers in emerging markets countries. See "Risk Factors" below.
As with an investment in any mutual fund, an investment in a Portfolio can
decrease in value and you can lose money.
WHO DISTRIBUTES THE TRUST'S SHARES?
Prudential Investment Management Services LLC (the "Distributor") acts as
the Distributor of the Trust's Class A, Class B, Class C and Class Z shares and
is paid a distribution and/or service fee with respect to each Portfolio's Class
A shares which is currently being charged at the annual rate of .25 of 1% of the
average daily net assets of each Portfolio's outstanding Class A shares and is
paid a distribution and service fee with respect to each Portfolio's Class B and
Class C shares at the annual rate of 1% of the average daily net assets of each
Portfolio's outstanding Class B and Class C shares. The Distributor incurs the
expense of distributing the Trust's Class Z shares under a Distribution
Agreement with the Trust, none of which is reimbursed by or paid for by the
Trust. See "How the Trust is Managed--Distributor."
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirements. There is no minimum investment requirement for certain
employee savings plans or custodial accounts for the benefit of minors. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Trust" and "Shareholder Guide--Shareholder Services."
HOW DO I PURCHASE SHARES?
You may purchase shares of the Portfolios through the Distributor, through
brokers or dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor ("Dealers") or directly from the Trust
through its transfer agent, Prudential Mutual Fund Services LLC ("PMFS" or the
"Transfer Agent"). In each case, sales are made at the net asset value per share
("NAV") next determined after receipt of your purchase order by the Transfer
Agent, a Dealer or the Distributor plus a sales charge, which may be imposed
either (i) at the time of purchase (Class A shares and Class C shares) or (ii)
on a deferred basis (Class B and Class C shares). Class Z shares are offered to
a limited group of investors at NAV without any sales charge. Dealers may charge
their customers a separate fee for handling purchase transactions. Participants
in programs sponsored by Prudential Retirement Services should contact their
client representative for more information about Class Z shares. See "How the
Trust Values its Shares" and "Shareholder Guide--How to Buy Shares of the
Trust."
3
<PAGE> 6
WHAT ARE MY PURCHASE ALTERNATIVES?
The Trust offers four classes of shares in each Portfolio:
<TABLE>
<S> <C>
- - Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
- - Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining to zero
from 5% of the lower of the amount invested or the
redemption proceeds), which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B
shares will automatically convert to Class A shares
approximately seven years after purchase.
- - Class C Shares: Sold with an initial sales charge of 1% of the offering
price and are also subject to a CDSC of 1% on redemptions
for a period of 18 months after purchase. Like Class B
shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares, but Class
C shares do not convert to another class.
- - Class Z Shares: Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not subject
to any ongoing service or distribution-related expenses.
See "Shareholder Guide--Alternative Purchase Plan."
</TABLE>
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
your Dealer, the Distributor or the Transfer Agent receives your sell order. The
proceeds of redemptions of Class B and Class C shares may be subject to a CDSC.
Dealers may charge their customers a separate fee for handling sale
transactions. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information about
selling their Class Z Shares. See "Shareholder Guide--How to Sell Your Shares."
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
Each Portfolio expects to pay dividends of net investment income, if any,
as follows:
<TABLE>
<CAPTION>
PORTFOLIO DIVIDENDS DECLARED AND PAID
- ---------------------------- ----------------------------
<S> <C>
Conservative Growth......... Quarterly
Moderate Growth............. Semi-Annually
Aggressive Growth........... Annually
</TABLE>
In addition, each Portfolio will make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of a Portfolio at NAV without a sales charge unless you
request that they be paid to you in cash. See "Taxes, Dividends and
Distributions."
4
<PAGE> 7
TRUST EXPENSES
CONSERVATIVE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------- ----------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)............... 5% None 1% None
Maximum Deferred Sales Load (as
a percentage of original
purchase price or redemption
proceeds, whichever is
lower)........................ None 5% during the first year, 1% on redemptions None
decreasing by 1% annually made within 18
to 1% in the fifth and months of
sixth years and 0% in the purchase
seventh year*
Sales Load Imposed on Reinvested
Dividends..................... None None None None
Redemption Fees................. None None None None
Exchange Fee.................... None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------- ----------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees................. .75% .75% .75% .75%
12b-1 Fees...................... .25%++ 1.00% 1.00% None
Other Expenses.................. .85% .85% .85% .85%
------------ ----- ----- ----------
Total Fund Operating Expenses... 1.85%++ 2.60% 2.60% 1.60%
------------ ----- ----- ----------
------------ ----- ----- ----------
</TABLE>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
+ Dealers may independently charge additional fees for shareholder transactions
or advisory services. Pursuant to rules of the National Association of
Securities Dealers, Inc., the aggregate initial sales charges, deferred sales
charges and asset-based sales charges ("12b-1 fees") on shares of the
Portfolio may not exceed 6.25% of total gross sales, subject to certain
exclusions. This 6.25% limitation is imposed on the Portfolio rather than on
a per shareholder basis. Therefore, long-term Class B and Class C
shareholders of the Portfolio may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such shares.
See "How the Trust is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Portfolio may pay up to an annual rate of .30 of 1% of the average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Portfolio so as not
to exceed .25 of 1% of the average daily net assets of the Class A shares.
This voluntary waiver may be terminated at any time without notice. See "How
the Trust is Managed--Distributor." Total Fund Operating Expenses for Class A
shares without such limitation would be 1.90%.
5
<PAGE> 8
MODERATE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------- ----------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price).................. 5% None 1% None
Maximum Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower).............. None 5% during the first year, 1% on redemptions None
decreasing by 1% annually made within 18
to 1% in the fifth and months of
sixth years and 0% in the purchase
seventh year*
Sales Load Imposed on Reinvested
Dividends........................ None None None None
Redemption Fees.................... None None None None
Exchange Fee....................... None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------- ----------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees.................... .75% .75% .75% .75%
12b-1 Fees......................... .25%++ 1.00% 1.00% None
Other Expenses..................... .86% .86% .86% .86%
------------ ----- ----- ----------
Total Fund Operating Expenses...... 1.86%++ 2.61% 2.61% 1.61%
------------ ----- ----- ----------
------------ ----- ----- ----------
</TABLE>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
+ Dealers may independently charge additional fees for shareholder transactions
or advisory services. Pursuant to rules of the National Association of
Securities Dealers, Inc., the aggregate initial sales charges, deferred sales
charges and asset-based sales charges ("12b-1 fees") on shares of the
Portfolio may not exceed 6.25% of total gross sales, subject to certain
exclusions. This 6.25% limitation is imposed on the Portfolio rather than on
a per shareholder basis. Therefore, long-term Class B and Class C
shareholders of the Portfolio may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such shares.
See "How the Trust is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Portfolio may pay up to an annual rate of .30 of 1% of the average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Portfolio so as not
to exceed .25 of 1% of the average daily net assets of the Class A shares.
This voluntary waiver may be terminated at any time without notice. See "How
the Trust is Managed--Distributor." Total Fund Operating Expenses for Class A
shares without such limitation would be 1.91%.
6
<PAGE> 9
AGGRESSIVE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------- ----------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price).................. 5% None 1% None
Maximum Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower).............. None 5% during the first year, 1% on redemptions None
decreasing by 1% annually made within 18
to 1% in the fifth and months of
sixth years and 0% in the purchase
seventh year*
Sales Load Imposed on Reinvested
Dividends........................ None None None None
Redemption Fees.................... None None None None
Exchange Fee....................... None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------- ----------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees.................... .75% .75% .75% .75%
12b-1 Fees......................... .25%++ 1.00% 1.00% None
Other Expenses..................... .86% .86% .86% .86%
------------ ----- ----- ----------
Total Fund Operating Expenses...... 1.86% 2.61% 2.61% 1.61%
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
+ Dealers may independently charge additional fees for shareholder transactions
or advisory services. Pursuant to rules of the National Association of
Securities Dealers, Inc., the aggregate initial sales charges, deferred sales
charges and asset-based sales charges ("12b-1 fees") on shares of the
Portfolio may not exceed 6.25% of total gross sales, subject to certain
exclusions. This 6.25% limitation is imposed on the Portfolio rather than on
a per shareholder basis. Therefore, long-term Class B and Class C
shareholders of the Portfolio may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such shares.
See "How the Trust is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Portfolio may pay up to an annual rate of .30 of 1% of the average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Portfolio so as not
to exceed .25 of 1% of the average daily net assets of the Class A shares.
This voluntary waiver may be terminated at any time without notice. See "How
the Trust is Managed--Distributor." Total Fund Operating Expenses for Class A
shares without such limitation would be 1.91%.
7
<PAGE> 10
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return, (2) redemption at the end of each time period and (3) with
respect to Class B and Class C shares only, no redemption at the end of each
time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Conservative Growth Portfolio
Class A................................................... $68 $105
Class B (Redemption)...................................... $76 $111
Class B (No Redemption)................................... $26 $ 81
Class C (Redemption)...................................... $46 $ 90
Class C (No Redemption)................................... $36 $ 90
Class Z................................................... $16 $ 50
Moderate Growth Portfolio
Class A................................................... $68 $106
Class B (Redemption)...................................... $76 $111
Class B (No Redemption)................................... $26 $ 81
Class C (Redemption)...................................... $46 $ 90
Class C (No Redemption)................................... $36 $ 90
Class Z................................................... $16 $ 51
Aggressive Growth Portfolio
Class A................................................... $68 $106
Class B (Redemption)...................................... $76 $111
Class B (No Redemption)................................... $26 $ 81
Class C (Redemption)...................................... $46 $ 90
Class C (No Redemption)................................... $36 $ 90
Class Z................................................... $16 $ 51
</TABLE>
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the foregoing tables and example is to assist an investor in
understanding the various types of costs and expenses that an investor in the
Portfolios will bear, whether directly or indirectly. For more complete
descriptions of the various costs and expenses, see "How the Trust is Managed."
"Other Expenses" are estimated for the fiscal year ending July 31, 1999, and
include Trustees' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian (domestic and foreign) fees.
8
<PAGE> 11
INTRODUCING PRUDENTIAL DIVERSIFIED SERIES
A recent study has shown that the greatest impact on long-term investment
returns is attributable to an investor's asset allocation decisions (i.e., the
mix of stocks, bonds and money market investments) rather than market timing or
individual security selection.(1) Most investors do not have the time, the
experience or the resources to implement a sound asset allocation strategy on
their own. Investors have increasingly looked to mutual funds as a way to
diversify their investments. However, most individual mutual funds do not
attempt to provide an asset allocation strategy tailored to the long-term
investment needs of a particular type of investor.
Prudential Diversified Series is designed for investors who want investment
professionals to make their asset allocation decisions. The Trust offers three
Portfolios designed to provide investors with a simple means to manage their
long-term investments prudently in light of their personal investment goals and
risk tolerance. Each Portfolio pursues its investment objective by investing in
a mix of stocks, bonds and money market instruments appropriate for a particular
type of investor. PIFM will manage each Portfolio so that it can serve as a
complete investment program or as an integral part of a larger investment
portfolio.
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
Each Portfolio has a distinct investment objective and is situated
differently along the risk/return spectrum.
[RISK/RETURN GRAPH]
- ---------------
(1)Source: Financial Analysts Journal. May/June 1991: "Determinants of
Portfolio Performance II: An Update," by Gary Brinson, Brian Singer and Gilbert
Beebower. Results are based on the 10-year performance records of 82 pension
funds. The study updates and supports a similar study done in 1986.
9
<PAGE> 12
The risk/return balance of each Portfolio depends upon the proportion of
assets it allocates to different types of investments.
PIMF has developed an asset allocation strategy for the Portfolios designed
to provide a mix of investment types and styles that is appropriate for
investors with a conservative, moderate or aggressive investment orientation.
CONSERVATIVE GROWTH PORTFOLIO may be appropriate for investors who are
seeking current income and low to moderate capital appreciation. Investors in
this Portfolio should have both sufficient time and tolerance for risk of
investment volatility to accept periodic declines. The Portfolio is generally
appropriate for investors with a reasonably long time horizon (e.g., investors
who are investing during early retirement).
MODERATE GROWTH PORTFOLIO may be appropriate for investors who are seeking
capital appreciation, but who are not willing to take the substantial market
risks associated with the Aggressive Growth Portfolio. Investors in this
Portfolio should have both the time and the tolerance for investment volatility
to accept possible large declines. The Portfolio is generally appropriate for
investors with a long time horizon (e.g., investors in their 50s who are saving
on a regular basis for retirement and who plan to retire in their early to mid
60s).
AGGRESSIVE GROWTH PORTFOLIO may be appropriate for investors seeking to
maximize the potential for capital appreciation. Investors in this Portfolio
should have both the time and tolerance for investment volatility to accept
substantial declines. The Portfolio is generally appropriate for investors with
a very long time horizon (e.g., investors in their 20s, 30s or 40s who are
saving for retirement and who plan to retire in their early to mid 60s).
An investor can choose any of these three Portfolios, depending on his or
her financial situation, personal investment objectives, time horizon and level
of risk tolerance.
HOW ARE THE PORTFOLIOS MANAGED?
The Manager has contracted with several highly regarded sub-advisers (the
"Advisers") to manage the assets of each Portfolio. Each Adviser manages a
portion of a Portfolio's assets, focusing on a particular type and style of
investing. The Manager monitors the performance of each Portfolio's Advisers and
allocates the Portfolio's assets among its Advisers. In addition, the Manager is
responsible for making strategic asset allocation decisions for each Portfolio.
In response to market developments, the Manager may change the allocations of a
Portfolio's assets among investment types and styles in accordance with the
Portfolio's investment objective and policies.
The Manager believes that its asset allocation strategy and multi-Adviser
approach will enhance the performance of the Portfolios and reduce their
volatility. First, the Manager believes that it can identify Advisers who will
achieve superior investment performance. Although each Adviser will focus the
management of its Portfolio segment in a particular type and style of investing,
the Manager believes that the combined efforts of several Advisers will result
in prudently diversified Portfolios. Lastly, the Manager believes that at any
given time, certain investment types and styles will generate higher returns
than others. Accordingly, the Manager believes that diversifying each Portfolio
among a variety of investment types and styles will reduce volatility.
10
<PAGE> 13
DESCRIPTION OF THE PORTFOLIOS
INVESTMENT OBJECTIVES AND POLICIES
Set forth below is a description of the investment objective and policies
of each Portfolio. Except for certain investment restrictions described in the
Statement of Additional Information, the investment objective and policies of
each Portfolio may be modified by the Board of Trustees. There can be no
assurance that a Portfolio will achieve its investment objective. As with an
investment in any mutual fund, an investment in a Portfolio can decrease in
value and you can lose money. Further information about the investment policies
of each Portfolio appears in the Statement of Additional Information.
CONSERVATIVE GROWTH PORTFOLIO
The Conservative Growth Portfolio's investment objective is to seek to
provide current income and a reasonable level of capital appreciation. The
Portfolio seeks to achieve its investment objective by investing in a
diversified portfolio of fixed income and equity securities. The table below
identifies the Portfolio's Advisers and their respective investment styles.
<TABLE>
<CAPTION>
INITIAL ALLOCATION
OF PORTFOLIO'S INVESTMENT
ADVISER ASSETS TYPE INVESTMENT STYLE
- ------- ------------------ ---------- ----------------
<S> <C> <C> <C>
15% Equities Growth-oriented, focusing on
large-cap stocks
15% Equities Value-oriented, focusing on
large-cap stocks
5% Equities Growth-oriented, focusing on
small-cap and mid-cap stocks
5% Equities Value-oriented, focusing on
small-cap and mid-cap stocks
40% Fixed Income Mostly high-quality debt
instruments
20% Fixed Income High yield debt, including
junk bonds and emerging market
debt
</TABLE>
The Manager is responsible for making strategic asset allocation decisions for
the Portfolio. In response to market developments, the Manager may change the
allocation of the Portfolio's assets among the portfolio segments identified
above, or may add or eliminate portfolio segments, in accordance with the
Portfolio's investment objective and the policies described below.
Under normal market conditions, approximately 60% of the Portfolio's total
assets will be invested in fixed income securities of varying maturities with a
dollar-weighted average portfolio maturity of between [four] and [fifteen]
years. The fixed income securities in which the Portfolio may invest include
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, corporate and other debt obligations, mortgage-backed
securities (including privately issued mortgage-related securities),
asset-backed securities, inflation-indexed bonds of
11
<PAGE> 14
governments and corporations, obligations of quasi-governmental entities,
commercial paper, certificates of deposit, money market instruments and loan
participations.
The Portfolio may invest up to 25% of its total assets in debt obligations
issued or guaranteed by foreign governments, their agencies and
instrumentalities, by supranational organizations and entities and by foreign
corporations or financial institutions. Up to 10% of the Portfolio's total
assets may be invested in debt obligations of issuers in emerging markets.
Foreign debt securities may be denominated in foreign currency or in the
European Currency Unit ("ECU"), a multinational currency unit which represents
specified amounts of currencies of certain member states of the European
Economic Community.
The fixed income securities held by the Portfolio will generally be
investment grade (rated at least "Baa" by Moody's Investors Service, Inc.
("Moody's") or "BBB" by Standard & Poor's Ratings Group ("S&P") or the
equivalent by another nationally recognized statistical rating organization
("NRSRO") or determined to be of comparable quality by the Adviser). However, up
to 35% of the Portfolio's total assets may be invested in fixed income
securities rated below investment grade. Securities rated "Baa" or lower by
Moody's or "BBB" or lower by S&P have speculative characteristics and are
subject to greater risks, including the risk of default. See "Risk Factors"
below.
The Portfolio may purchase and write (i.e., sell) put and call options on
debt securities, on U.S. Government securities, on aggregates of debt
securities, and on financial indices. The Portfolio may also purchase and sell
futures contracts on interest rates, on debt securities, on financial indices,
on U.S. Government securities, and on related options which are traded on a
commodities exchange or board of trade for certain bona fide hedging, return
enhancement and risk management purposes.
Under normal market conditions, approximately 40% of the Portfolio's total
assets will be invested in equity securities issued by U.S. and foreign
companies. The Portfolio's equity investments may include common stock,
securities convertible into common stock and preferred stock. The Portfolio may
invest up to 15% of its total assets in equity securities issued by foreign
companies, including companies based in emerging markets.
The Portfolio intends to invest in the securities of foreign companies
whose securities are traded on exchanges located in the countries in which the
issuers are principally based. The Portfolio may invest in securities of foreign
issuers in the form of American Depositary Receipts ("ADRs"), which are U.S.
dollar-denominated receipts typically issued by U.S. banks or trust companies
that represent the deposit with those entities of securities of a foreign
issuer. ADRs are publicly traded on exchanges or over-the-counter in the United
States. Global Depositary Receipts ("GDRs") may also be purchased by the
Portfolio. GDRs are generally issued by foreign banks and evidence ownership of
either foreign or domestic securities. The Portfolio may also invest in European
Depositary Receipts ("EDRs"), which are receipts issued in Europe, typically by
foreign banks and trust companies, that evidence ownership of either foreign or
domestic underlying securities.
The Portfolio may invest in securities of issuers in developed as well as
developing or "emerging market" countries. Investing in the markets of
developing countries involves exposure to economies that are generally less
diverse and mature, and to political systems that can be expected
12
<PAGE> 15
to have less stability than those of developed countries. The Advisers will
attempt to limit exposure to investments in developing countries where both
liquidity and sovereign risk are high. Historical experience indicates that the
markets of developing countries have been more volatile than the markets of
developed countries. For a discussion of the risks associated with investing in
foreign securities, see "Risk Factors."
The Portfolio may attempt to hedge against unfavorable changes in currency,
exchange and other rates by engaging in foreign currency exchange contracts,
purchasing and writing put and call options on foreign currencies and trading
currencies futures contracts and options thereon and in other hedging
techniques. There can be no assurance that any technique or strategy will be
successful. The use of these techniques and strategies entails certain risks.
See "Risk Factors -- Foreign Securities and Currency Risks" and "Other
Investments and Policies -- Special Risks of Hedging and Return Enhancement
Strategies."
When market or economic conditions indicate, in the view of an Adviser,
that a temporary defensive investment strategy is appropriate, the Adviser may
invest its portion of the Portfolio without limitation in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, corporate
and other debt obligations and high quality money market instruments.
Percentage and quality limitations applicable to the Portfolio's
investments are generally measured at the time a transaction is entered into.
Any subsequent change in a rating assigned by any NRSRO to a security, or change
in the percentage of Portfolio assets invested in certain securities or other
instruments resulting from market fluctuations or other changes in the
Portfolio's total assets will not require the Portfolio to dispose of an
investment unless the Adviser determines that it is practicable to dispose of
the investment without undue market or tax consequences to the Portfolio. If
different NRSROs assign different ratings to the same security, the Adviser will
determine which rating it believes best reflects the security's quality and risk
at that time, which may be the higher of the several assigned ratings.
13
<PAGE> 16
MODERATE GROWTH PORTFOLIO
The Moderate Growth Portfolio's investment objective is to seek to provide
capital appreciation and a reasonable level of current income. The Portfolio
seeks to achieve its investment objective by investing in a diversified
portfolio of equity and fixed income securities. The table below identifies the
Portfolio's Advisers and their respective investment styles.
<TABLE>
<CAPTION>
INITIAL ALLOCATION
OF PORTFOLIO'S INVESTMENT
ADVISER ASSETS TYPE INVESTMENT STYLE
------- ------------------ ---------- ----------------
<S> <C> <C> <C>
20% Equities Growth-oriented, focusing on
large-cap stocks
20% Equities Value-oriented, focusing on
large-cap stocks
7.5% Equities Growth-oriented, focusing on
small-cap and mid-cap stocks
7.5% Equities Value-oriented, focusing on
small-cap and mid-cap stocks
10% International
Equities
20% Fixed Income Mostly high-quality debt
instruments
15% Fixed Income High yield debt, including
junk bonds and emerging
markets debt
</TABLE>
The Manager is responsible for making strategic asset allocation decisions for
the Portfolio. In response to market developments, the Manager may change the
allocation of the Portfolio's assets among the portfolio segments identified
above, or may add or eliminate portfolio segments in accordance with the
Portfolio's investment objective and the policies described below.
Under normal market conditions, approximately 65% of the Portfolio's total
assets will be invested in equity securities of U.S. and foreign companies. The
Portfolio's equity investments may include common stock, securities convertible
into common stock and preferred stock. The Portfolio may invest up to 20% of its
total assets in equity securities issued by foreign companies, including
companies based in emerging markets.
The Portfolio intends to invest in the securities of foreign companies
whose securities are traded on exchanges located in the countries in which the
issuers are principally based. The Portfolio also may invest in securities of
foreign issuers in the form of American Depositary Receipts ("ADRs"), which are
U.S. dollar-denominated receipts typically issued by U.S. banks or trust
companies that represent the deposit with those entities of securities of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in the
United States. Global Depositary Receipts ("GDRs") may also be purchased by the
Portfolio. GDRs are generally issued by foreign banks and evidence ownership of
either foreign or domestic securities. The Portfolio may also invest in European
Depositary Receipts ("EDRs"), which are receipts issued in Europe, typically by
foreign banks and trust companies, that evidence ownership of either foreign or
domestic underlying securities.
14
<PAGE> 17
Under normal market conditions, approximately 35% of the Portfolio's total
assets will be invested in fixed income securities of varying maturities with a
dollar-weighted average maturity of between [four] and [fifteen] years. The
fixed income securities in which the Portfolio may invest include obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities,
corporate and other debt obligations, convertible securities, mortgage-backed
securities (including privately issued mortgage-related securities),
asset-backed securities, inflation-indexed bonds of governments and
corporations, obligations of quasi-governmental entities, commercial paper,
certificates of deposit, money market instruments and loan participations.
The Portfolio may invest up to 25% of its total assets in debt obligations
issued or guaranteed by foreign governments, their agencies and
instrumentalities, by supranational organizations and entities and by foreign
corporations or financial institutions. Up to 10% of the Portfolio's total
assets may be invested in debt obligations of issuers in emerging markets.
Foreign securities may be denominated in foreign currencies or in the European
Currency Unit ("ECU"), a multi-national currency unit which represents specified
amounts of currencies of certain member states of the European Economic
Community.
The fixed income securities held by the Portfolio will generally be
investment grade. However, up to 35% of the Portfolio's total assets may be
invested in fixed income securities rated below investment grade. Securities
rated Baa or lower by Moody's or "BBB" or lower by S&P have speculative
characteristics and are subject to greater risks, including the risk of default.
See "Risk Factors" below.
The Portfolio may purchase and write (i.e., sell) put and call options on
debt securities, on U.S. Government securities, on aggregates of debt
securities, and on financial indices. The Portfolio may also purchase and sell
futures contracts on interest rates, on debt securities, on financial indices,
on U.S. Government securities, and on related options which are traded on a
commodities exchange or board of trade for certain bona fide hedging, return
enhancement and risk management purposes.
The Portfolio may attempt to hedge against unfavorable changes in currency
exchange rates by engaging in forward currency transactions, purchasing and
writing put and call options on foreign currencies and trading currency futures
contracts and options thereon.
The Portfolio may invest in securities of issuers in developed as well as
developing or "emerging market" countries. Investing in the markets of
developing countries involves exposure to economies that are generally less
diverse and mature, and to political systems that can be expected to have less
stability than those of developed countries. The Advisers will attempt to limit
exposure to investments in developing countries where both liquidity and
sovereign risk are high. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of developed
countries. For a discussion of the risks associated with investing in foreign
securities, see "Risk Factors."
When market or economic conditions indicate, in the view of an Adviser,
that a temporary defensive investment strategy is appropriate, the Adviser may
invest its portion of the Portfolio without limitation in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, corporate
and other debt obligations and high quality money market instruments.
15
<PAGE> 18
Percentage and quality limitations applicable to the Portfolio's
investments are generally measured at the time a transaction is entered into.
Any subsequent change in a rating assigned by any NRSRO to a security, or change
in the percentage of Portfolio assets invested in certain securities or other
instruments resulting from market fluctuations or other changes in the
Portfolio's total assets will not require the Portfolio to dispose of an
investment unless the Adviser determines that it is practicable to dispose of
the security without undue market or tax consequences to the Portfolio. If
different NRSROs assign different ratings to the same security, the Adviser will
determine which rating it believes best reflects the security's quality and risk
at that time, which may be the higher of the several assigned ratings.
AGGRESSIVE GROWTH PORTFOLIO
The Aggressive Growth Portfolio's investment objective is to seek to
provide long-term capital appreciation. The Portfolio seeks to achieve its
investment objective by investing in a diversified portfolio of equity
securities issued by U.S. and foreign companies. Under normal market conditions,
substantially all of the Portfolio's assets will be invested in equity
securities, including common stock, securities convertible into common stock and
preferred stock. The Portfolio may invest up to 30% of its total assets in the
equity securities of foreign companies, including companies based in emerging
markets. The table below identifies the Portfolio's Advisers and their
respective investment styles.
<TABLE>
<CAPTION>
INITIAL ALLOCATION
OF PORTFOLIO'S INVESTMENT
ADVISER ASSETS TYPE INVESTMENT STYLE
------- ------------------ ---------- ----------------
<S> <C> <C> <C>
25% Equities Growth-oriented, focusing on
large-cap stocks
25% Equities Value-oriented, focusing on
large-cap and mid-cap stocks
15% Equities Growth-oriented, focusing on
small-cap and mid-cap stocks
15% Equities Value-oriented, focusing on
small-cap stocks
20% International
Equities
</TABLE>
The Manager is responsible for making strategic asset allocation decisions for
the Portfolio. In response to market developments, the Manager may change the
allocation of the Portfolio's assets among the portfolio segments identified
above, or may add or eliminate portfolio segments in accordance with the
Portfolio's investment objective and the policies described below.
The Portfolio intends to invest in the securities of foreign companies
whose securities are traded on exchanges located in the countries in which the
issuers are principally based. The Portfolio also may invest in securities of
foreign issuers in the form of American Depositary Receipts ("ADRs"), which are
U.S. dollar-denominated receipts typically issued by U.S. banks or trust
companies that represent the deposit with those entities of securities of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in the
United States. Global Depositary Receipts ("GDRs") may also be purchased by the
Portfolio. GDRs are generally issued by foreign banks and
16
<PAGE> 19
evidence ownership of either foreign or domestic securities. The Portfolio may
also invest in European Depositary Receipts ("EDRs"), which are receipts issued
in Europe, typically by foreign banks and trust companies, that evidence
ownership of either foreign or domestic underlying securities.
The Portfolio may invest in securities of issuers in developed as well as
developing or "emerging market" countries. Investing in the markets of
developing countries involves exposure to economies that are generally less
diverse and mature, and to political systems that can be expected to have less
stability than those of developed countries. The Advisers will attempt to limit
exposure to investments in developing countries where both liquidity and
sovereign risk are high. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of developed
countries. For a discussion of the risks associated with investing in foreign
securities, see "Risk Factors."
The Portfolio may attempt to hedge against unfavorable changes in currency
exchange rates by engaging in forward currency transactions, purchasing and
writing put and call options on foreign currencies and trading currency futures
contracts and options thereon.
When market or economic conditions indicate, in the view of an Adviser,
that a temporary defensive investment strategy is appropriate, the Adviser may
invest its portion of the Portfolio without limitation in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, corporate
and other debt obligations and high quality money market instruments.
Percentage limitations applicable to the Portfolio's investments are
generally measured at the time a transaction is entered into. Any subsequent
change in the percentage of Portfolio assets invested in certain securities or
other instruments resulting from market fluctuations or other changes in the
Portfolio's total assets will not require the Portfolio to dispose of an
investment unless the Adviser determines that it is practicable to dispose of
the security without undue market or tax consequences to the Portfolio.
INTRODUCING THE ADVISERS
[ADD PARAGRAPH FOR EACH ADVISER SUMMARIZING ITS INVESTMENT PHILOSOPHY]
RISK FACTORS
GENERAL. As with all mutual funds, investments in the Portfolios involve
certain risks. Investing in stocks involves the risk of market volatility, which
may cause stocks to decline in value. As noted below, certain types of equity
securities, such as the stocks of small and mid-sized companies and the stocks
of foreign companies, are generally more volatile than the stocks of large U.S.
companies.
The market value of fixed-income obligations held by the Portfolios will be
affected by general changes in interest rates, which will result in increases or
decreases in the value of such obligations. The market value of the obligations
held by a Portfolio can be expected to vary inversely with changes in prevailing
interest rates. Investors also should recognize that, in periods of declining
interest rates, the yield of a Portfolio's fixed income component will tend to
be somewhat higher than prevailing market rates and, in periods of rising
interest rates, the yield of a Portfolio's fixed
17
<PAGE> 20
income component will tend to be somewhat lower. Also, when interest rates are
falling, the proceeds of new sales of a Portfolio's shares will tend to be
invested in instruments producing lower yields than the balance of its
portfolio, thereby reducing the current yield of the Portfolio's fixed income
component. In periods of rising interest rates, the opposite can be expected to
occur. In addition, securities in which a Portfolio may invest may not yield as
high a level of current income as might be achieved by investing in securities
with less liquidity, lower quality or longer maturities.
Ratings made available by S&P, Moody's and other NRSRO's are relative and
subjective and are not absolute standards of quality. Although these ratings are
initial criteria for selection of portfolio investments, each Adviser will also
make its own evaluation of these securities on behalf of the Portfolios. Among
the factors that will be considered are the long-term ability of the issuers to
pay principal and interest and general economic trends.
MEDIUM- AND LOWER-RATED SECURITIES. The Conservative Growth and Moderate
Growth Portfolios may each invest in medium-rated securities, (i.e., rated "Baa"
by Moody's or "BBB" by S&P or the equivalent by another NRSRO) and in
lower-rated securities (i.e., rated lower than "Baa" by Moody's or lower than
"BBB" by S&P or the equivalent by another NRSRO). Securities rated "Baa" by
Moody's or "BBB" by S&P or the equivalent by another NRSRO, although considered
investment grade, possess speculative characteristics, including the risk of
default, and changes in economic or other conditions are more likely to impair
the ability of issuers of these securities to make interest and principal
payments than is the case with respect to issuers of higher-grade bonds.
Generally, medium- or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds" (i.e., securities
rated lower than "Baa" by Moody's or "BBB" by S&P or the equivalent by another
NRSRO), offer a higher current yield than is offered by higher-rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality bonds. In addition, medium-and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
The risk of loss due to default by these issuers is significantly greater
because medium-and lower-rated securities and unrated securities of comparable
quality generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Advisers, under the supervision of the
Manager and the Trustees, in evaluating the creditworthiness of an issue whether
rated or unrated, take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium- and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for each Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid
18
<PAGE> 21
trading market may restrict the availability of securities for a Portfolio to
purchase and may also have the effect of limiting the ability of a Portfolio to
sell securities at their fair value either to meet redemption requests or to
respond to changes in the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline
proportionately more than a portfolio consisting of higher-rated securities. If
a Portfolio experiences unexpected net redemptions, it may be forced to sell its
higher-rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Portfolio and increasing the exposure of the Portfolio to
the risks of lower-rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
SMALL AND MEDIUM CAPITALIZATION COMPANIES. Investments in the stocks of
small and medium capitalization companies (i.e., companies with a market
capitalization of under $5 billion) involve special risks. Small- and mid-cap
companies may have limited product lines, markets or financial resources and may
lack management depth. The securities of those issuers may also have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general.
FOREIGN SECURITIES AND CURRENCY RISKS. The Conservative Growth and
Moderate Growth Portfolios may each invest in foreign debt securities, and each
of the Portfolios may invest in foreign equity securities, including securities
of issuers in emerging market countries.
Investing in securities issued by foreign governments and companies
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. Government or by U.S. corporations.
Less information may be available about foreign companies than about domestic
companies and foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic companies.
The values of foreign investments are affected by changes in currency rates
or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
Investing in the fixed-income markets of emerging market countries involves
exposure to economies that are generally less diverse and mature, and to
political systems which can be
19
<PAGE> 22
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.
Because some of the securities purchased by the Portfolios are denominated
in currencies other than the U.S. dollar, changes in foreign currency exchanges
rates may affect the Portfolios' net asset value; gains and losses realized on
the sale of securities; and net investment income and capital gain, if any, to
be distributed to shareholders by the Portfolios. If the value of a foreign
currency rises against the U.S. dollar, the value of a Portfolio's assets
denominated in that currency will increase; correspondingly, if the value of a
foreign currency declines against the U.S. dollar, the value of a Portfolio's
assets denominated in that currency will decrease. Under the Internal Revenue
Code, the Portfolios are required to separately account for the foreign currency
component of gains or losses, which will usually be viewed under the Internal
Revenue Code as items of ordinary and distributable income or loss, thus
affecting the Portfolios' distributable income.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental interpretation, speculation and
other economic and political conditions. Although the Portfolios value their
assets daily in U.S. dollars, the Portfolios will not convert their holdings of
foreign currencies to U.S. dollars daily. When a Portfolio converts its holdings
to another currency it may incur conversion costs. Foreign exchange dealers may
realize a profit on the difference between the price at which they buy and sell
currencies.
OTHER INVESTMENTS AND POLICIES
MONEY MARKET INSTRUMENTS
Each Portfolio may invest in high-quality money market instruments,
including commercial paper of a U.S. or non-U.S. company or 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 generally will
be U.S. dollar denominated. Commercial paper will be rated, at the time of
purchase, at least "A-2" by S&P or "Prime-2" by Moody's, or the equivalent by
another NRSRO or, if not rated, issued by an entity having an outstanding
unsecured debt issue rated at least "A" or "A-2" by S&P or "A" or "Prime-2" by
Moody's or the equivalent by another NRSRO.
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in U.S. Government securities.
U.S. TREASURY SECURITIES. U.S. Treasury securities include 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 length of their maturities and the date of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. Securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government include, but are not limited to,
securities issued by the Government National Mortgage Association
20
<PAGE> 23
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). Obligations of GNMA, the Federal
Housing Administration, Farmers Home Administration and the Export-Import Bank
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
Portfolios 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 itself in the event the agency or instrumentality does not
meet its commitments. Such securities include obligations issued by the Student
Loan Marketing Association ("SLMA"), FNMA and FHLMC, each of which may borrow
from the U.S. Treasury to meet its obligations, although the U.S. Treasury is
under no obligation to lend to such entities. GNMA, FNMA and FHLMC may also
issue collateralized mortgage obligations. See "Mortgage Backed
Securities--Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities" below.
STRIPPED U.S. GOVERNMENT SECURITIES. A Portfolio may invest in component
parts of U.S. Government securities, namely either the corpus ("principal") of
such obligations or one of the interest payments scheduled to be paid on such
obligations. These obligations may take the form of (i) obligations from which
the interest coupons have been stripped; (ii) the interest coupons that are
stripped; and (iii) book-entries at a Federal Reserve member bank representing
ownership of obligation components.
MORTGAGE RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Portfolio may invest in mortgage-backed
securities and other derivative mortgage products, including those representing
an undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and
FHLMC certificates where the U.S. Government or its agencies or
instrumentalities guarantees the payment of interest and principal of these
securities. See "Mortgage-Backed Securities" below. However, these guarantees do
not extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates, nor do these guarantees extend to the yield
or value of a Portfolio's shares. See "Additional Investment Information--U.S.
Government Securities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. See "Mortgage-Backed
Securities" below.
In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, a Portfolio may also invest in mortgage pass-through
securities issued by the U.S. Government or its agencies and instrumentalities,
commonly referred to as mortgage-backed security strips or "MBS strips." 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 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
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principal, the Portfolio 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.
ZERO COUPON SECURITIES. Zero coupon U.S. Government securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon U.S. Government securities do not require the
periodic payment of interest. These investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of cash. These investments
may experience greater volatility in market value than U.S. Government
securities that make regular payments of interest. A Portfolio accrues income on
these investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations, in which case the Portfolio will forego the purchase
of additional income producing assets with these funds. Zero coupon U.S.
Government securities include STRIPS and CUBES, which are issued by the U.S.
Treasury as component parts of U.S. Treasury bonds and represent scheduled
interest and principal payments on the bonds.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Conservative Growth and Moderate Growth Portfolios may each invest in
corporate and other debt obligations. These debt securities may have adjustable
or fixed rates of interest and in certain instances may be secured by assets of
the issuer. Adjustable rate corporate debt securities may have features similar
to those of adjustable rate mortgage-backed securities, but corporate debt
securities, unlike mortgage-backed securities, are not subject to prepayment
risk other than through contractual call provisions which generally impose a
penalty for prepayment. Fixed-rate debt securities may also be subject to call
provisions.
NON-PUBLICLY TRADED SECURITIES. The Portfolios may each invest in
non-publicly traded securities, which may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Portfolios. In addition, companies whose securities are
not publicly traded are not subject to the disclosure and other investor
protection requirements that may be applicable if their securities were publicly
traded.
MORTGAGE-BACKED SECURITIES
The Conservative Growth and Moderate Growth Portfolios may each invest in
mortgage-backed securities. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There are currently three
basic types of mortgage-backed securities: (i) those issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities, such as GNMA, FNMA
and FHLMC, described under "U.S. Government Securities" above; (ii) those issued
by private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (iii) those issued by private
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issuers that represent an interest in or are collateralized by whole mortgage
loans or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMs") are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for such
an instrument exceeds the sum of the interest accrued at the applicable mortgage
interest rate and the principal payment required at such point to amortize the
outstanding principal balance over the remaining term of the loan, the excess is
utilized to reduce the then outstanding principal balance of the ARM.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed-rate or adjustable rate
mortgage loans. Since private mortgage pass-through securities typically are not
guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC, such
securities generally are structured with one or more types of credit
enhancement. Types of credit enhancements are described under "Types of Credit
Enhancement" below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Multiclass pass-through
securities are equity interests in a trust composed of Mortgage Assets. Payments
of principal and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. 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 Mortgage Assets may cause the
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CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
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 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.
A Portfolio also may invest in, among other things, parallel pay CMOs and
planned amortization class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on rules and interpretations of the Commission, a Portfolio's
investments in certain qualifying CMOs and REMICs are not subject to the
Investment Company Act's limitation on acquiring interests in other investment
companies. See "Additional Investment Information--Mortgage-Backed
Securities--Collateralized Mortgage Obligations" in the Statement of Additional
Information.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities or
"MBS strips" are derivative multiclass mortgage securities. In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, a
Portfolio may purchase MBS strips issued by private originators of, or investors
in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. See "U.S.
Government Securities--Mortgage-Related Securities Issued or Guaranteed by U.S.
Government Agencies and Instrumentalities" above.
ASSET-BACKED SECURITIES
The Conservative Growth and Moderate Growth Portfolios may each invest in
asset-backed securities. Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables and home equity loans, have been securitized in pass-through
structures similar to the mortgage pass-through structures or in a pay-through
structure similar to the CMO structure. A Portfolio may invest in these and
other types of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of a security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In general, these types of
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loans are of shorter average life than mortgage loans and are less likely to
have substantial prepayments.
TYPES OF CREDIT ENHANCEMENT
Mortgage-backed securities and asset-backed securities are often backed by
a pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, those securities may contain elements of credit support which fall
into two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to seek to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from default seeks to ensure ultimate payment of the
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated could
adversely affect the return on an investment in a security. A Portfolio will not
pay any additional fees for credit support, although the existence of credit
support may increase the price of a security.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES
The yield characteristics of mortgage-backed and asset-backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if a
Portfolio purchases such a security at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate that
is slower than expected will have the opposite effect of increasing yield to
maturity. Alternatively, if a Portfolio purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. Moreover, slower than
expected prepayments may effectively change a security which was considered
short- or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally lead to increased volatility of net asset value
because they tend to fluctuate more widely in response to changes in interest
rates than short- or intermediate-term securities. A Portfolio may invest a
portion of its assets in derivative mortgage-backed securities such as MBS
Strips which are highly sensitive to changes in prepayment and interest rates.
Each Adviser will seek to manage these risks (and potential benefits) by
diversifying its investments in such securities and, in certain circumstances,
through hedging techniques.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities. See "Additional Investment Information" in the
Statement of Additional Information. See "Asset-Backed Securities."
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Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-backed
securities, although less likely to experience the same prepayment rates as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-backed securities and asset-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 rising interest rates, the rate of prepayment
of mortgages underlying mortgage-backed securities can be expected to decline,
extending the projected average maturity of the mortgage-backed securities. This
maturity extension risk may effectively change a security which was considered
short- or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.
ADJUSTABLE RATE SECURITIES
The Conservative Growth and Moderate Growth Portfolios may each invest in
adjustable rate securities. Adjustable rate securities are debt securities
having interest rates which are adjusted or reset at periodic intervals ranging
from one month to three years. The interest rate of an adjustable rate security
typically responds to changes in general market levels of interest. The interest
paid on any particular adjustable rate security is a function of the index upon
which the interest rate of that security is based.
The adjustable rate feature of the securities in which a Portfolio may
invest will tend to reduce sharp changes in a Portfolio's net asset value in
response to normal interest rate fluctuations. As the coupon rates of a
Portfolio's adjustable rate securities are reset periodically, yields of these
portfolio securities will reflect changes in market rates and should cause the
net asset value of a Portfolio's shares to fluctuate less dramatically than that
of a fund invested in long-term fixed-rate securities. However, while the
adjustable rate feature of such securities will tend to limit sharp swings in a
Portfolio's net asset value in response to movements in general market interest
rates, it is anticipated that during periods of fluctuations in interest rates,
the net asset value of a Portfolio will fluctuate.
INFLATION-INDEXED BONDS
The Conservative Growth and Moderate Growth Portfolios may invest in
inflation-indexed bonds issued by governmental entities and corporations.
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Such bonds generally
are issued at an interest rate lower than typical bonds, but are expected to
retain their principal value over time. The interest rate on these bonds is
fixed at issuance, but over the life of the bond this interest may be paid on an
increasing principal value, which has been adjusted for inflation.
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Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
CUSTODIAL RECEIPTS
Each Portfolio may invest in receipts evidencing the component parts
(corpus or coupons) of U.S. Government obligations that have not actually been
stripped. Such receipts evidence ownership of component parts (corpus or
coupons) of U.S. Government obligations purchased by a third party (typically an
investment banking firm) and held on behalf of the third party in physical or
book entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. Custodial receipts held by a third party
are not issued or guaranteed by the United States Government and are not
considered U.S. Government securities. Each Portfolio may also invest in such
custodial receipts. See "Additional Investment Information--Other Investments"
in the Statement of Additional Information.
CONVERTIBLE SECURITIES
Each Portfolio may invest in convertible securities. A convertible security
is typically a bond, debenture, corporate note, preferred stock or other similar
security which may be converted at a stated price within a specified period of
time into a specified number of shares of common stock or other equity
securities of the same or a different issuer. 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 also include preferred stocks, which technically are
equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying common 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.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
The Portfolios may each engage in various portfolio strategies, including
using derivatives, to reduce certain risks of its investments and to attempt to
enhance return. A Portfolio, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies include the use of
forward exchange contracts, options, futures contracts and options thereon. The
Portfolio's ability to use these strategies may be limited by market conditions,
regulatory limits and
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tax considerations and there can be no assurance that any of these strategies
will succeed. See "Additional Investment Information" and "Taxes, Dividends and
Distributions" in the Statement of Additional Information. New financial
products and risk management techniques continue to be developed and each
Portfolio may use these new investments and techniques to the extent consistent
with its investment objectives and policies.
OPTIONS TRANSACTIONS. A Portfolio may purchase and write (i.e., sell) put
and call options on securities and financial indices that are traded on national
securities exchanges or in the over-the-counter ("OTC") market to attempt to
enhance return or to hedge its portfolio. These investments may include options
on equity securities, debt securities, aggregates of debt securities, financial
indices (e.g., S&P 500) and U.S. Government securities. The Portfolios may also
purchase and write put and call options on foreign currencies and foreign
currency futures. A Portfolio may write covered put and call options to attempt
to generate additional income through the receipt of premiums, purchase put
options in an effort to protect the value of a security that it owns against a
decline in market value and purchase call options in an effort to protect
against an increase in price of securities or currencies it intends to purchase.
A Portfolio may also purchase put and call options to offset previously written
put and call options of the same series. See "Additional Investment
Information--Options on Securities" in the Statement of Additional Information.
A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities or currency
subject to the option at a specified price (the exercise price or strike price).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When a Portfolio writes a call
option, the Portfolio 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 a Portfolio 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 Portfolio might, therefore, be obligated to purchase the
underlying securities for more than their current market price.
A Portfolio will write only "covered" options. A written option is covered
if, so long as the Portfolio is obligated under the option, it (i) owns an
offsetting position in the underlying security or currency or (ii) segregates
cash or other liquid assets, in an amount equal to or greater than its
obligation under the option. Under the first circumstance, the Portfolio's
losses are limited because it owns the underlying security; under the second
circumstance, in the case of a written call option, the Portfolio's losses are
potentially unlimited. See "Additional Investment Information" in the Statement
of Additional Information. A Portfolio may only write covered put options to the
extent that cover for such options does not exceed 25% of the Portfolio's net
assets. A Portfolio will not purchase an option if, as a result of such
purchase, more than 20% of its total assets would be invested in premiums for
options and options on futures.
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OVER-THE-COUNTER OPTIONS. A Portfolio may also purchase and write (i.e.,
sell) put and call options on equity and debt securities and on stock indexes in
the over-the-counter market ("OTC options"). Unlike exchange-traded options, OTC
options are contracts between the Portfolio and its counterparty without the
interposition of any clearing organization. Thus, the value of an OTC option is
particularly dependent on the financial viability of the OTC counterparty. The
Portfolio's ability to purchase and write OTC options may be limited by market
conditions, regulatory limits and tax considerations. There are certain risks
associated with investments in OTC options. See "Additional Investment
Information--Additional Risks--Options Transactions and Related Risks" in the
Statement of Additional Information.
FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolios may each enter into
foreign currency exchange contracts to protect the value of its portfolio
against future changes in the level of currency exchange rates. A Portfolio may
enter into such contracts on a spot, i.e., cash, basis at the rate then
prevailing in the currency exchange market or on a forward basis, by entering
into a forward contract to purchase or sell currency. A forward contract on
foreign currency is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days agreed upon by the parties
from the date of the contract at a price set on the date of the contract.
A Portfolio'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 Portfolio generally arising in connection with
the purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Portfolio expenses. Position hedging is (1) the sale of
a foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a currency bearing a substantial correlation to
the value of that currency (cross-currency hedge) or (2) the purchase of a
foreign currency when the Adviser believes that the U.S. dollar may decline
against that foreign currency. Although there are no limits on the number of
forward contracts which a Portfolio may enter into, a Portfolio may not position
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any purchase or sale of
foreign currency) of the securities being hedged. The Adviser may use foreign
currency hedging techniques, including cross-currency hedges, to attempt to
protect against declines in the U.S. dollar value of income available for
distribution to shareholders and declines in the net asset value of a
Portfolio's shares resulting from adverse changes in currency exchange rates.
For example, the return available from securities denominated in a particular
foreign currency would diminish in the event the value of the U.S. dollar
increased against such currency. Such a decline could be partially or completely
offset by an increase in value of a position hedge involving a forward exchange
contract to (A) sell the currency in which the position being hedged is
denominated, or a currency bearing a substantial correlation to the value of
such currency, or (B) purchase either the U.S. dollar or a foreign currency
expected to perform better than the currency being sold. Position hedges may,
therefore, provide protection of net asset value in the event of a general rise
in the U.S. dollar against foreign currencies. However, a cross-currency hedge
cannot protect against exchange rates risks perfectly, and if the Adviser is
incorrect in its judgment of future exchange rate relationships, the Portfolio
could be in a less advantageous position than if such a hedge had not been
established.
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INDEXED COMMERCIAL PAPER. The Portfolios may each invest in commercial
paper which is indexed to certain specific foreign currency exchange rates. The
terms of such commercial paper provide that its principal amount is adjusted
upwards or downwards (but not below zero) at maturity to reflect changes in the
exchange rate between two currencies while the obligation is outstanding. A
Portfolio will purchase such commercial paper with the currency in which it is
denominated and, at maturity, will receive interest and principal payments
thereon in that currency, but the amount of principal payable by the issuer at
maturity will change in proportion to the change (if any) in the exchange rate
between the two specified currencies between the date the instrument is issued
and the date the instrument matures. With respect to its investments in this
type of commercial paper, a Portfolio will segregate cash or other liquid assets
having a value at least equal to the aggregate principal amount of outstanding
commercial paper of this type. While such commercial paper entails the risk of
loss of principal, the potential for realizing gains as a result of changes in
foreign currency exchange rates enables the Portfolio to hedge (or cross-hedge)
against a decline in the U.S. dollar value of investments denominated in foreign
currencies while providing an attractive money market rate of return. See
"Additional Investment Information--Forward Foreign Currency Exchange Contracts"
in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON. The Portfolios may each purchase and
sell financial futures contracts and options thereon which are traded on a
commodities exchange or board of trade for hedging purposes, to reduce and
manage certain risks of its investments and to attempt to enhance return, in
each case in accordance with regulations of the Commodity Futures Trading
Commission. The Portfolios, and thus their investors, may lose money through any
unsuccessful use of these strategies. Futures contracts purchased by the
Portfolios may entitle a Portfolio to purchase or accept for future delivery
debt securities, aggregates of debt securities, currencies, financial indices or
U.S. Government securities, and include futures contracts which are linked to
the London Interbank Offered Rate ("LIBOR").
A Portfolio'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 price of the securities
being hedged is imperfect and there is a risk that the value of the securities
being hedged may increase or decrease at a greater rate than a specified futures
contract resulting in losses to a Portfolio.
A Portfolio's ability to enter into or close out futures contracts and
options thereon may also be limited by the requirements of the Internal Revenue
Code of 1986, as amended (the Internal Revenue Code") for qualification as a
regulated investment company. See "Additional Investment Information--Futures
Contracts" and "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exemption is conditioned on a Portfolio purchasing and selling futures contracts
and options thereon for bona fide hedging transactions, except that the
Portfolio may purchase and sell futures contracts and options thereon for any
other purposes to the
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extent that the aggregate initial margin and option premiums do not exceed 5% of
the market value of the Portfolio's total assets.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES. Participation in the
options or futures markets involves investment risks and transaction costs to
which a Portfolio would not be subject absent the use of these strategies. A
Portfolio, and thus its investors, may lose money through any unsuccessful use
of these strategies. If an Adviser's predictions of movements in the direction
of the securities, foreign currency or interest rate markets are inaccurate, the
adverse consequences to a Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of options and
futures contracts and options on futures contracts include (1) dependence on the
Adviser's ability to predict correctly movements in the direction of interest
rates and securities prices; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices of
the securities being hedged; (3) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular instrument
at any time; (5) the possible need to defer closing out certain hedged positions
to avoid adverse tax consequences; and (6) the possible inability of a Portfolio
to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for a Portfolio to sell a
portfolio security at a disadvantageous time, due to the need for a Portfolio to
maintain "cover" or to segregate securities in connection with hedging
transactions. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements whereby the seller of
the security agrees to repurchase that security from a Portfolio 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 a Portfolio's money
is invested in the repurchase agreement. A Portfolio'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 instruments declines, a Portfolio will require additional collateral.
In the event of a default, insolvency or bankruptcy by a seller, the Portfolio
will promptly seek to liquidate the collateral. In such circumstances, the
Portfolio could experience a delay or be prevented from disposing of the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the resale price,
the Portfolio will suffer a loss. See "Additional Investment
Information--Repurchase Agreements" in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Each Portfolio may enter into reverse repurchase agreements, and the
Conservative Growth and Moderate Growth Portfolios may enter into dollar rolls.
The proceeds from such transactions will be used for the clearance of
transactions or to take advantage of investment opportunities.
Reverse repurchase agreements involve sales by a Portfolio of securities
concurrently with an agreement by the Portfolio to repurchase the same assets at
a later date at a fixed price. During the
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reverse repurchase agreement period, the Portfolio continues to receive
principal and interest payments on these securities.
Dollar rolls involve sales by a Portfolio of securities for delivery in the
current month and a simultaneous contract to repurchase substantially similar
(same type and coupon) securities on a specified future date from the same
party. During the roll period, a Portfolio forgoes principal and interest paid
on the securities. A Portfolio is compensated by the difference between the
current sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction.
A Portfolio will segregate with its custodian cash or other liquid assets
equal in value to its obligations in respect of reverse repurchase agreements
and dollar rolls. Reverse repurchase agreements and dollar rolls involve the
risk that the market value of the securities retained by a Portfolio may decline
below the price of the securities a Portfolio has sold but is obligated to
repurchase under the agreement. If the buyer of securities under a reverse
repurchase agreement or dollar roll files for bankruptcy or becomes insolvent, a
Portfolio's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
a Portfolio's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls, including covered dollar
rolls, are speculative techniques involving leverage and are considered
borrowings by a Portfolio for purposes of the percentage limitations applicable
to borrowings. See "Borrowing" below.
SECURITIES LENDING
Each Portfolio may lend portfolio securities to brokers or dealers, banks
or other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of a Portfolio in an amount equal to at
least 100% of the market value, determined daily, of the securities loaned.
During the time portfolio securities are on loan, the borrower will pay a
Portfolio an amount equivalent to any dividend or interest paid on such
securities and a Portfolio may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower. As with any extensions of credit, there are risks of delay in recovery
and in some cases loss of rights in the collateral should the borrower of the
securities fail financially. A Portfolio cannot lend more than 33 1/3% of the
value of its total assets (including the amount of the loan collateral). See
"Additional Investment Information--Lending of Securities" in the Statement of
Additional Information.
INTEREST RATE SWAP TRANSACTIONS
The Conservative Growth and Moderate Growth Portfolios may each enter into
interest rate swaps. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive interest,
for example, an exchange of floating rate payments for fixed-rate payments. Each
Portfolio expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities a Portfolio anticipates
purchasing at a later date. Each Portfolio
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intends to use these transactions as a hedge and not as a speculative
investment. See "Additional Investment Information--Interest Rate Swap
Transactions" in the Statement of Additional Information. The risk of loss with
respect to interest rate swaps is limited to the net amount of interest payments
that the Portfolio is contractually obligated to make and will not exceed 5% of
a Portfolio's net assets. The use of interest rate swaps may involve investment
techniques and risks different from those associated with ordinary portfolio
transactions. If an Adviser is incorrect in its forecast of market values,
interest rates and other applicable factors, the investment performance of the
Portfolio would diminish compared to what it would have been if this investment
technique was never used.
INVESTMENT COMPANY SECURITIES
The Portfolios may invest in securities issued by other investment
companies which invest in short-term debt securities and which seek to maintain
a $1.00 net asset value per share (money market funds). The Portfolios may also
invest in securities issued by other investment companies with similar
investment objectives. The Portfolios may also purchase shares of investment
companies investing primarily in foreign securities, including so-called
"country funds." Country funds have portfolios consisting primarily of
securities of issuers located in one foreign country. Each Portfolio will not
hold more than 3% of the outstanding voting securities of any one investment
company, will not have invested more than 5% of its total assets in any one
investment company and will not have invested more than 10% of its total assets
(determined at the time of investment) in investment company securities in the
aggregate. As a shareholder of another investment company, a Portfolio would
bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the expenses each Portfolio bears in connection with its own
operations.
ILLIQUID SECURITIES
Each Portfolio may hold up to 15% of its net assets in illiquid securities.
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.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), and privately placed
commercial paper that have a readily available market are not considered
illiquid for purposes of this limitation. The Portfolios' investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing Rule 144A securities. The Manager and the Advisers will monitor the
liquidity of such restricted securities under the supervision of the Trustees.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as "cover" for written OTC options are illiquid
securities. However, with respect to U.S. Government securities, a Portfolio may
treat the securities it uses as "cover" for written OTC options on U.S.
Government securities as liquid provided it follows a specified procedure. A
Portfolio may sell such OTC options only to qualified dealers who agree that a
Portfolio may repurchase any options it writes for a maximum price to be
calculated by a predetermined formula.
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In such cases, OTC options would be considered liquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option. See "Additional Investment Information--Illiquid Securities" in the
Statement of Additional Information.
When a Portfolio enters into interest rate swaps on other than a net basis,
the entire amount of the Portfolio's obligations, if any, with respect to such
interest rate swaps will be treated as illiquid. To the extent that a Portfolio
enters into interest rate swaps on a net basis, the net amount of the excess, if
any, of the Portfolio's obligations over its entitlements with respect to each
interest rate swap will be treated as illiquid. The Portfolios will also treat
non-U.S. Government POs and IOs as illiquid securities so long as the staff of
the Commission maintains its position that such securities are illiquid.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Portfolio 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 a Portfolio with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to a Portfolio at the time of entering into the transaction.
While a Portfolio will only purchase securities on a when-issued or
delayed-delivery basis with the intention of acquiring the securities, a
Portfolio may sell the securities before the settlement date, if it is deemed
advisable by the Adviser. At the time a Portfolio makes the commitment to
purchase securities on a when-issued or delayed-delivery basis, the Portfolio
will record the transaction and thereafter reflect the value, each day, of such
security in determining the net asset value of the Portfolio. 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 a Portfolio's assets committed to the
purchase of securities on a when-issued or delayed-delivery basis may increase
the volatility of the Portfolio's net asset value. The Trust's Custodian will
segregate cash or other liquid assets having a value equal to or greater than a
Portfolio's purchase commitments. The securities so purchased are subject to
market fluctuations and no interest accrues to the purchaser during the period
between purchase and settlement.
One form of when-issued or delayed-delivery security that the Portfolios
may purchase is a "to be announced" mortgage-backed security. A "to be
announced" mortgage-backed security transaction arises when a mortgage-backed
security, such as a GNMA pass-through security, is purchased or sold with the
specific pools that will constitute that GNMA pass-through security to be
announced on a future settlement date.
SHORT SALES
Each Portfolio may sell a security it does not own in anticipation of a
decline in the market value of that security (i.e., make short sales).
Generally, to complete the transaction, a Portfolio will borrow the security to
make delivery to the buyer. The Portfolio is then obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Portfolio. Until the security is replaced, the
Portfolio is required to pay to the lender any interest which accrues during the
period of the loan. To borrow the security, the Portfolio may be required to pay
a premium which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the
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broker to the extent necessary to meet margin requirements until the short
position is closed out. Until the Portfolio replaces the borrowed security, it
will (a) segregate with its custodian cash or other liquid assets at such a
level that the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current market value of the security
sold short and will not be less than the market value of the security at the
time it was sold short or (b) otherwise cover its short position.
A Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Portfolio replaces the borrowed security. The Portfolio will realize a gain
if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of any premium or interest paid in connection
with the short sale. No more than 5% of any Portfolio's net assets will be, when
added together: (i) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (ii) segregated in connection with
short sales.
Each Portfolio may also make short sales against-the-box. A short sale
against-the-box is a short sale in which a Portfolio owns an equal amount of the
securities sold short or securities convertible into or exchangeable for, with
or without payment of any further consideration, such securities; provided that
if further consideration is required in connection with the conversion or
exchange, cash or other liquid assets, in an amount equal to such consideration
must be segregated for an equal amount of the securities of the same issuer as
the securities sold short.
BORROWING
Each Portfolio may borrow from banks or through dollar rolls or reverse
repurchase agreements an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes, for the clearance of transactions or to take advantage of
investment opportunities. Each Portfolio may pledge its total assets to secure
these borrowings.
If a Portfolio borrows to invest in securities, or if a Portfolio purchases
securities at a time when borrowings exceed 5% of its total assets, 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 a Portfolio, the net asset value of the
Portfolio's shares will decrease faster than would otherwise be the case. This
is the speculative characteristic known as "leverage." See "Reverse Repurchase
Agreements and Dollar Rolls" above.
If any Portfolio's asset coverage for borrowings falls below 300%, such
Portfolio will take prompt action to reduce its borrowings even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
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PORTFOLIO TURNOVER
The portfolio turnover rate for each of the Portfolios may exceed 100%,
although the rate for each Portfolio is not expected to exceed [150%]. High
portfolio turnover (100% or more) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by each
Portfolio. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information. In addition, high portfolio turnover may result in
increased short-term capital gains, which when distributed to shareholders, are
treated as ordinary income. See "Taxes, Dividends, and Distributions."
INVESTMENT RESTRICTIONS
The Portfolios are subject to certain investment restrictions which
constitute fundamental policies. Fundamental policies cannot be changed with
respect to any Portfolio without the approval of a majority of the outstanding
voting securities of that Portfolio, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
MANAGEMENT OF THE TRUST
The Trustees, in addition to overseeing the actions of the Trust's Manager
and Advisers, as set forth below, decide upon matters of general policy. The
Trust's Manager conducts and supervises the daily business operations of the
Trust. The Portfolios' Advisers furnish daily investment advisory services.
MANAGER
Prudential Investments Fund Management LLC ("PIFM" or the "Manager"),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, is the
Manager of the Trust. PIFM is organized in New York as a limited liability
company. It is an indirect, wholly-owned subsidiary of The Prudential Insurance
Company of America ("Prudential"), a major diversified insurance and financial
services company.
As of January 31, 1998, PIFM served as manager to 42 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $63 billion.
Pursuant to a Management Agreement ("Management Agreement") with the Trust,
PIFM manages the investment operations of the Trust, administers the Trust's
affairs and is responsible for the selection, subject to review and approval of
the Trustees, of Advisers for each of the Portfolios and the review of their
continued performance. See "Manager" in the Statement of Additional Information.
Pursuant to separate sub-advisory agreements (the "Advisory Agreements")
between PIFM and the Advisers, the Advisers furnish investment advisory services
in connection with the management of the Trust. Each Adviser is paid a fee for
its services by the Manager out of the fee it collects from the Portfolio based
upon the portion of assets the Adviser manages. Under the
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Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises the Advisers' performance of such services.
Subject to the supervision and direction of the Trustees, the Manager
provides to the Trust investment management evaluation services principally by
selecting Advisers for each Portfolio and thereafter monitoring their
performance. In evaluating prospective Advisers, the Manager considers, among
other factors, each Adviser's level of expertise, relative performance,
consistency of performance, and investment discipline or philosophy. The Manager
has responsibility for communicating performance expectations and evaluations to
the Advisers and ultimately recommending to the Trustees whether the Advisers'
contracts should be renewed, modified or terminated. The Manager provides
reports to the Trustees regarding the results of its evaluation and monitoring
functions. The Manager is also responsible for conducting all operations of the
Trust except those operations contracted to the Advisers, custodian and transfer
agent. Each Portfolio pays the Manager a fee for its services that is computed
daily and paid monthly at the annual rate specified below based on the value of
the average net assets of the Portfolio. The Manager pays the Advisers fees,
computed daily and paid monthly, equal to the annual rate specified below based
on the value of each Portfolio's average daily net assets:
<TABLE>
<CAPTION>
PORTION PAID
BY THE MANAGER
PORTFOLIO MANAGER'S FEE TO THE ADVISERS
--------- ------------- ---------------
<S> <C> <C>
Conservative Growth Portfolio................. .75% %
Moderate Growth Portfolio..................... .75% %
Aggressive Growth Portfolio................... .75% %
</TABLE>
The Manager and the Trust operate under an exemptive order from the
Commission which permits the Manager, subject to certain conditions, to enter
into or amend Advisory Agreements without obtaining shareholder approval each
time. On , 1998, the sole shareholder of the Trust voted
affirmatively to give the Trust this ongoing authority. With Board approval, the
Manager is permitted to replace Advisers or employ additional Advisers for the
Portfolios, change the terms of the Portfolios' Advisory Agreements or enter
into a new Advisory Agreement with an existing Adviser after events that cause
an automatic termination of the old Advisory Agreement with that Adviser.
Shareholders of a Portfolio continue to have the right to terminate an Advisory
Agreement for the Portfolio at any time by a vote of the majority of the
outstanding voting securities of the Portfolio. Shareholders will be notified of
any Adviser changes or other material amendments to Advisory Agreements that
occur under these arrangements.
ADVISERS
Subject to the supervision and direction of the Manager and, ultimately,
the Trustees, each Adviser is responsible for managing the securities held in
the Portfolio segment the Adviser manages in accordance with the Portfolio's
stated investment objective and policies, making investment decisions for such
Portfolio segment, placing orders to purchase and sell securities on behalf of
such Portfolio segment, and performing various administrative functions
associated with serving as an Adviser. The Advisers furnish investment advisory
services in connection with the management of the Portfolios and are paid their
fees by PIFM, not the Trust.
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Each Adviser manages a discrete segment of the assets of a Portfolio. Daily
cash inflows (i.e., subscriptions and reinvested distributions) and outflows
(i.e., redemptions and expenses items) will be allocated among the Advisers of
each Portfolio as the Manager deems it appropriate. In response to market
developments, the Manager may adjust the allocations of each Portfolio's assets
in accordance with its investment objective and policies. By using several
Advisers for the Portfolios, and by periodically rebalancing a Portfolio in
accordance with the allocation strategy described above, the Manager seeks
long-term benefits from a balance of different investment disciplines, which is
intended to achieve a certain continuity in each Portfolio's performance.
Reallocations may result in additional transaction costs to the extent that
sales of securities as part of such reallocations result in higher portfolio
turnover. In addition, if one Adviser buys a security as the other Adviser sells
it, the net position of the Portfolio in the security may be approximately the
same as it would have been with a single Adviser and no such sale and purchase,
but the Portfolio will have incurred additional transaction costs and other
expenses. The Manager will consider these costs in determining the allocation
and reallocation of assets.
The following sets forth certain information about each of the Advisers:
CONSERVATIVE GROWTH PORTFOLIO
[More on Advisers]
MODERATE GROWTH PORTFOLIO
[More on Advisers]
AGGRESSIVE GROWTH PORTFOLIO
[More on Advisers]
FEE WAIVERS AND SUBSIDIES
PIFM may from time to time agree to waive all or a portion of its
management fee and subsidize certain operating expenses of the Portfolios. Fee
waivers and expense subsidies will increase a Portfolio's yield or total return.
See "General Information -- Performance Information."
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE "DISTRIBUTOR"), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE THAT SERVES
AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE
TRUST. IT IS A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE "CLASS A PLAN," THE
"CLASS B PLAN" AND THE "CLASS C PLAN," COLLECTIVELY, THE "PLANS") ADOPTED BY THE
TRUST UNDER RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION
AGREEMENT (THE "DISTRIBUTION AGREEMENT"), THE DISTRIBUTOR INCURS THE EXPENSES OF
DISTRIBUTING THE TRUST'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor
also incurs the expenses of distributing the Trust's Class Z shares under the
Distribution Agreement, none of which is reimbursed by or paid for by the Trust.
These expenses
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include commissions and account servicing fees paid to, or on account of,
Dealers or financial institutions which have entered into agreements with the
Distributor, advertising expenses, the cost of printing and mailing prospectuses
to potential investors and indirect and overhead costs of the Distributor
associated with the sale of Portfolio shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, each Portfolio 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 with respect to
a Portfolio, the Portfolio will not be obligated to pay any additional expenses.
If the Distributor's expenses are less than such distribution and service fees,
it will retain its full fees and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the distribution,
marketing, administrative and other services and activities provided by Dealers
with respect to the promotion of the sale of each Portfolio's shares and the
maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, EACH PORTFOLIO MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts ("service fee") and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has voluntarily
limited its distribution-related fees payable under the Class A Plan to .25 of
1% of the average daily net assets of the Class A shares. This voluntary waiver
may be terminated at any time without notice.
UNDER THE CLASS B AND CLASS C PLANS, EACH PORTFOLIO PAYS THE DISTRIBUTOR
FOR ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to the
Distributor of (i) a distribution fee of .75 of 1% of the average daily net
assets of each of the Class B and Class C shares, respectively, and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class B
and Class C shares. The service fee is used to pay for personal service and/or
the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide -- How to Sell Your Shares -- Contingent Deferred Sales
Charges."
Each Portfolio records all payments made under the Plans as expenses in the
calculation of net investment income. See "Distributor" in the Statement of
Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of a Portfolio will be allocated to each such class based upon
the ratio of sales of each such class to the sales of Class A, Class B or Class
C shares of the Portfolio [other than expenses allocable to a particular class].
Each Portfolio bears its own expenses under the Plans, and the distribution fee
and sales charge of one class of a Portfolio will not be used to subsidize the
sale of the Portfolio's other classes.
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Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Trustees of the Trust, including a
majority of the Trustees who are not "interested persons" of the Trust (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the "Rule 12b-1 Trustees"), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Trustees
or of a majority of the outstanding shares of the applicable class of a
Portfolio. A Portfolio will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by each Portfolio under
the Class A, Class B and Class C Plans, the Manager (or one of its affiliates)
may make payments out of its own resources to Dealers and other persons which
distribute shares of the Portfolios (including Class Z shares). Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities Incorporated ("Prudential Securities"), which is an
affiliate of the Manager and the Distributor, an Adviser or an affiliate thereof
(each an "affiliated broker") may each act as a broker or futures commission
merchant for a Portfolio. In order for an affiliated broker to effect any
portfolio transactions for a Portfolio on an exchange or board of trade, the
commissions, fees or other remuneration received by the affiliated broker must
be reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers or futures commission merchants in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange or board of trade during a comparable period of time. This standard
would allow an affiliated broker to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arm's-length transaction.
YEAR 2000
The services provided to the Trust and the shareholders by the Manager, the
Advisers, the Distributor, the Transfer Agent and the Custodian depend on the
smooth functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. This 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
Trust, the Manager, the Advisers, the Distributor, the Transfer Agent and the
Custodian have each advised the Trust that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems will be adapted in time for that event.
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<PAGE> 43
NET ASSET VALUE
Net asset value per share is calculated separately for each class of each
Portfolio by dividing the value of all securities and other assets owned by a
Portfolio that are allocated to a particular class of shares, less the
liabilities charged to that class, by the number of shares of the class that are
outstanding. The Trustees have fixed the specific time of day for the
computation of each Portfolio's net asset value to be as of 4:15 p.m., New York
time.
Portfolio securities are valued based on market quotations or, if such
quotations are not readily available, at fair value as determined in good faith
under procedures established by the Trustees. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
The Trust will compute its net asset value once daily on days that the New
York Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem shares have been received by the Trust or days on which
changes in the value of portfolio securities do not materially affect the net
asset value of a Portfolio.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE PORTFOLIOS
YOU MAY PURCHASE SHARES OF THE PORTFOLIOS THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUCO SECURITIES CORPORATION
("PRUSEC"), OR DIRECTLY FROM THE TRUST THROUGH ITS TRANSFER AGENT, PRUDENTIAL
MUTUAL FUND SERVICES LLC ("PMFS" OR THE "TRANSFER AGENT"), ATTENTION: INVESTMENT
SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in
programs sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form (in
accordance with procedures established by the Transfer Agent in connection with
investors' accounts) by the Distributor, your Dealer or the Transfer Agent, plus
a sales charge which, at your option, may be imposed either (i) at the time of
purchase (Class A shares and Class C shares) or (ii) on a deferred basis (Class
B and Class C shares). Class Z shares are offered to a limited group of
investors at net asset value without any sales charge. Dealers may charge their
customers a separate fee for handling purchase transactions. Payment may be made
by wire, check or through your brokerage account. See "Alternative Purchase
Plan" and "Net Asset Value."
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. The minimum subsequent investment is
$100 for Class A, Class B and Class C shares. There are no minimum investment
requirements for Class Z shares. All minimum investment requirements are waived
for certain employee savings plans or custodial accounts for the benefit of
minors. For purchases through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below.
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Application forms can be obtained from the Transfer Agent or the
Distributor. If a stock certificate is desired, it must be requested in writing
for each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive stock
certificates.
The Trust reserves the right to reject any purchase order (including an
exchange into a Portfolio) or to suspend or modify the continuous offering of
its shares. See "How to Sell Your Shares" below.
Your Dealer is responsible for forwarding payment promptly to the Trust.
The Distributor reserves the right to cancel any purchase order for which
payment has not been received by the third business day following the placement
of the order.
Transactions in shares of the Portfolios may be subject to postage and
handling charges imposed by your Dealer. Any such charge is retained by the
Dealer and is not remitted to the Portfolios.
Purchase by Wire. For an initial purchase of shares of a Portfolio by
wire, you must complete an application and telephone PMFS to receive an account
number at (800) 225-1852 (toll-free). The following information will be
requested: your name, address, tax identification number, the Portfolio and
class of shares you are selecting, 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 Asset Allocation Trust, specifying on the wire the account number
assigned by PMFS and your name and the Portfolio in which you want to invest 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 a Portfolio as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies the relevant Portfolio,
share class 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.
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<PAGE> 45
ALTERNATIVE PURCHASE PLAN
THE TRUST OFFERS FOUR CLASSES OF SHARES IN EACH PORTFOLIO (CLASS A, CLASS
B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL
SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES ("ALTERNATIVE PURCHASE PLAN").
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES (AS A
% OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ----------------------- -----------------
<S> <C> <C> <C>
CLASS Maximum initial sales .30 of 1% (currently Initial sales charge
A...... charge of 5% of the public being charged at a rate waived or reduced for
offering price of .25 of 1%) certain purchases
CLASS Maximum CDSC of 5% of the 1% Shares convert to Class A
B...... lesser of the amount shares approximately seven
invested or the redemption years after purchase
proceeds; declines to zero
after six years
CLASS Initial sales charge of 1% 1% Shares do not convert to
C...... of the public offering another class
price and maximum CDSC of
1% of the lesser of the
amount invested or the
redemption proceeds on
redemptions made within 18
months of purchase
CLASS None None Sold to a limited group of
Z...... investors
</TABLE>
The four classes of shares in each Portfolio represent interests in the
same portfolio of investments of the Trust and have the same rights, except that
(i) each class (with the exception of Class Z shares, which are not subject to
any distribution and/or service fees) bears the separate expenses of its Rule
12b-1 distribution and service plan, (ii) each class has exclusive voting rights
on any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class; (iii)
each class has a different exchange privilege; (iv) only Class B shares have a
conversion feature; and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How to Exchange Your Shares" below. The income
attributable to each class and the dividends payable on the shares of each class
will be reduced by the amount of the distribution fee (if any) of each class.
Class B and Class C shares of each Portfolio bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares of the Portfolio.
Financial advisers and other sales agents who sell shares of the Trust will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares of the Portfolios and will generally receive more compensation initially
for selling Class A and Class B shares than for selling Class C or Class Z
shares.
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<PAGE> 46
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following information 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 Portfolios.
If you intend to hold your investment in a Portfolio for less than 7 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 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class A or Class B shares over 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 for the higher cumulative annual distribution-related fee on
those shares to exceed the initial sales charge plus cumulative annual
distribution-related fees on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class B or
Class C distribution-related fee on the investment, fluctuations in NAV, the
effect of the return on the investment over this period of time or redemptions
when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
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<PAGE> 47
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ --------------- --------------- --------------------
<S> <C> <C> <C>
Less than $25,000.......... 5.00% 5.26% 4.75%
$25,000 to $49,999......... 4.50% 4.71% 4.25%
$50,000 to $99,999......... 4.00% 4.17% 3.75%
$100,000 to $249,999....... 3.25% 3.36% 3.00%
$250,000 to $499,999....... 2.50% 2.56% 2.40%
$500,000 to $999,999....... 2.00% 2.04% 1.90%
$1,000,000 and above....... None None None
</TABLE>
The Distributor may reallow the entire sales charge to Dealers. Dealers may
be deemed to be underwriters, as that term is defined under the federal
securities laws. The Distributor reserves the right, without prior notice to any
Dealer, to suspend or eliminate Dealer concessions or commissions.
In connection with the sale of the Class A shares at NAV (without payment
of an initial sales charge), the Manager, the Distributor or one of their
affiliates will pay Dealers, financial advisers and other persons who distribute
shares a finders' fee from its own resources based on a percentage of the NAV of
shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Portfolios and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code (collectively, "Benefit Plans"), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping ("Direct Account Benefit Plans") and
Benefit Plans sponsored by Prudential Securities or its subsidiaries ("PSI or
Subsidiary Prototype Benefit Plans"), Class A shares may be purchased at NAV by
participants who are repaying loans made from such plans to the participant.
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<PAGE> 48
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain retirement and deferred compensation plans, qualified or non-qualified
under the Internal Revenue Code, for which Prudential serves as the plan
administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the Portfolios are
an available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Section 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
PruArray and SmartPath Programs (benefit plan recordkeeping services) (hereafter
referred to as a "PruArray" or "SmartPath Plan"). All plans of a company for
which Prudential serves as plan administrator or recordkeeper are aggregated in
meeting the $1 million threshold. The term "existing assets" as used herein
includes stock issued by a plan sponsor, shares of Prudential Mutual Funds and
shares of certain unaffiliated mutual funds that participate in the PruArray or
SmartPath Programs ("Participating Funds"). "Existing assets" also include
monies invested in The Guaranteed Interest Account ("GIA"), a group annuity
insurance product issued by Prudential, and units of The Stable Value Fund
("SVF"), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided (i)
the purchase is made with the proceeds of a redemption from either GIA or SVF
and (ii) Class A shares are an investment option of the plan.
Pruarray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association ("Association") that
participate in the PruArray Program provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified Plan(s) or non-qualified
plans so long as the employers in the Association (i) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (ii) maintain their accounts with the Trust's Transfer Agent.
Pruarray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts ("IRAs") and Savings Accumulation Plans
of the company's employees. The Program is available only to (i) employees who
open an IRA or Savings Accumulation Plan account with the Transfer Agent and
(ii) spouses of employees who open an IRA account with the Transfer Agent. The
Program is offered to companies that have at least 250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV,
through the Distributor or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Trust), (b) employees of
the Distributor, Prudential Securities, PIFM and their subsidiaries and members
of the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of the
Prudential Mutual Funds provided that purchases at NAV are permitted by such
person's employer, (d) Prudential, employees and special agents of Prudential
and its subsidiaries and all persons who
46
<PAGE> 49
have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of Dealers who have
entered into a selected dealer agreement with the Distributor, provided that
purchases at NAV are permitted by such person's employer, (f) investors who have
a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end,
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases and (g) investors in IRAs, provided the purchase is made with
the proceeds of a tax-free, rollover of assets from a Benefit Plan for which
Prudential Investments serves as the recordkeeper or administrator.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Trust Shares -- Reduction and Waiver of Initial Sales
Charges -- Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B shares is the NAV next determined following
receipt of an order by the Transfer Agent, your Dealer or the Distributor. The
offering price of Class C shares is the NAV next determined following receipt of
an order by the Transfer Agent, your Dealer or the Distributor plus a sales
charge equal to 1% of the public offering price. Redemption of Class B and Class
C shares may be subject to a CDSC. See "How to Sell Your Shares -- Contingent
Deferred Sales Charges."
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to Dealers, financial advisers and
other persons who sell Class B shares at the time of sale from its own
resources. This facilitates the ability of the Trust to sell the Class B shares
of the Portfolios without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Trust is Managed -- Distributor." In connection with the sale of Class
C shares, the Distributor will pay, from its own resources, Dealers, financial
advisers and other persons which distribute Class C shares a sales commission of
up to % of the purchase price at the time of the sale.
Class Z Shares
Class Z shares of each Portfolio are currently available for purchase by:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation plans and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code, and
non-qualified plans for which the Portfolio is an available option
(collectively, "Benefit Plans"), provided that such Benefit Plans (in
combination with other plans sponsored by
47
<PAGE> 50
the same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants in any fee-based program or trust
program sponsored by an affiliate of the Distributor which includes mutual funds
as investment options and for which the Portfolio is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by an affiliate of the Distributor for whom Class Z shares of the
Prudential Mutual Funds are an available investment option; (iv) Benefit Plans
for which an affiliate of the Distributor serves as recordkeeper and as of
September 20, 1996, (a) were Class Z shareholders of the Prudential Mutual
Funds, or (b) executed a letter of intent to purchase Class Z shares of the
Prudential Mutual Funds; (v) current and former Directors/Trustees of the
Prudential Mutual Funds (including the Trust); (vi) employees of Prudential or
Prudential Securities who participate in an employer-sponsored employee savings
plan and (vii) Prudential with an investment of $10 million or more. After a
Benefit Plan qualifies to purchase Class Z shares, all subsequent purchases will
be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, Distributor or
one of their affiliates may pay Dealers, financial advisers and other persons
who distribute shares a finders' fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE PORTFOLIOS AT ANY TIME FOR CASH AT THE NAV PER
SHARE NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM
(IN ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION
WITH INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER.
See "How the Trust Values its Shares." In certain cases, however, redemption
proceeds will be reduced by the amount of any applicable CDSC, as described
below. See "Contingent Deferred Sales Charges" below. If you are redeeming your
shares of a Portfolio through a Dealer, your Dealer must receive your sell order
before the Portfolio computes its NAV for that day (i.e., 4:15 P.M., New York
time) in order to receive that day's NAV. Your Dealer will be responsible for
furnishing all necessary documentation to the Distributor and may charge you for
its services in connection with redeeming shares of the Portfolios.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR
YOUR DEALER IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION
IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE
OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the Trust in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and
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<PAGE> 51
make reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Prudential Preferred
Financial Services offices. In the case of redemptions from a PruArray or
SmartPath Plan, if the proceeds of the redemption are invested in another
investment option of the plan, in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. If you hold
shares through a Dealer, payment for shares presented for redemption will be
credited to your account at your Dealer unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange (the "Exchange") is closed for other than customary
weekends and holidays, (b) when trading on the Exchange is restricted, (c) when
an emergency exists as a result of which disposal by a Portfolio of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Portfolio fairly to determine the value of its net assets, or (d) during
any other period when the Commission, by order, so permits; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE TRUST OR THE TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF
THE PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY
PURCHASING SHARES BY WIRE OR BY CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Trustees determines that it would be
detrimental to the best interests of the remaining shareholders of a Portfolio
to make payment wholly or partly in cash, the Portfolio may pay the redemption
price in whole or in part by a distribution in kind of securities from the
investment portfolio of the Portfolio, in lieu of cash, in conformity with
applicable rules of the Commission. Securities will be readily marketable and
will be valued in the same manner as a regular redemption. See "Net Asset
Value." If your shares are redeemed in kind, you would incur transaction costs
in converting the assets into cash. The Trust has, however, elected to be
governed by Rule 18f-1 under the Investment Company Act, under which each
Portfolio is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the NAV of the Portfolio during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Portfolios, the
Board of Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
investment in a Portfolio has a net asset value of less than $500 due to a
redemption. The Trust will give any such shareholder 60 days' prior written
notice in which to purchase sufficient additional shares of the Portfolio 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 Portfolios at the NAV
next determined after the order is received, which must be within 90 days after
the date of redemption. Any CDSC paid in connection with such redemption will be
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<PAGE> 52
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Transfer Agent,
either directly or through the Distributor or your Dealer, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss depending on the amount
reinvested, may not be allowed for federal income tax purposes. For more
information on the rule which disallows a loss on the sale or exchange of shares
of the Portfolios which are replaced, see "Taxes, Dividends and Distributions"
in the Statement of Additional Information.
Contingent Deferred Sales Charges
Redemptions of Class B shares will be subject to a contingent deferred
sales charge ("CDSC") declining to zero from 5% over a six-year period. Class C
shares redeemed within 18 months of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares of a Portfolio to an amount which is
lower than the amount of all payments by you for shares of that Portfolio during
the preceding six years, in the case of Class B shares, and 18 months, in the
case of Class C shares. 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 and shares purchased through reinvestment of dividends
or distributions are not subject to CDSC. The amount of any contingent deferred
sales charge will be paid to and retained by the Distributor. See "How the Trust
is Managed -- Distributor" and "Waiver of Contingent Deferred Sales Charges"
below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month after
the initial purchase, excluding the time shares were held in a money market
fund. See "How to Exchange Your Shares" below.
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The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS (WHICHEVER IS LOWER)
------------------- -------------------------------------------
<S> <C>
First................................ 5.0%
Second............................... 4.0%
Third................................ 3.0%
Fourth............................... 2.0%
Fifth................................ 1.0%
Sixth................................ 1.0%
Seventh.............................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results generally in the lowest
possible rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in NAV above the total
amount of payments for the purchase of Portfolio shares made during the
preceding six years; then of amounts representing the cost of shares held beyond
the applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares of a Portfolio at $10
per share for a cost of $1,000. Subsequently, you acquired 5 additional Class B
shares through dividend reinvestment. During the second year after the purchase,
you decided to redeem $500 of your investment. Assuming at the time of the
redemption the NAV had appreciated to $12 per share, the value of your Class B
shares would be $1,260 (105 shares at $12 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds
($500 minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination or disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are: (i) in the case of a tax-deferred
retirement plan, a lump-sum or other distribution after retirement; (ii) in the
case of an IRA (including a Roth IRA), a lump-sum or other distribution after
attaining age 59 1/2 or a
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<PAGE> 54
periodic distribution based on life expectancy; (iii) in the case of a Section
403(b) custodial account, a lump sum or other distribution after attaining age
59 1/2 and (iv) a tax-free return of an excess contribution or plan
distributions following the death or disability of the shareholder, provided
that the shares were purchased prior to death or disability. The waiver does not
apply in the case of a tax-free rollover or transfer of assets, other than one
following a separation from service, i.e., following voluntary or involuntary
termination of employment or following retirement. Under no circumstances will
the CDSC be waived on redemptions resulting from the termination of a
tax-deferred retirement plan unless such redemptions otherwise qualify as a
waiver as described above. In the case of Direct Account and Prudential
Securities or Subsidiary Prototype Benefit Plans, the CDSC will be waived on
redemptions which represent borrowings from such plans. Shares purchased with
amounts used to repay a loan from such plans on which a CDSC was not previously
deducted will thereafter be subject to a CDSC without regard to the time such
amounts were previously invested. In the case of a 401(k) plan, the CDSC will
also be waived upon the redemption of shares purchased with amounts used to
repay loans made from the account to the participant and from which a CDSC was
previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on
certain redemptions from a Systematic Withdrawal Plan. On an annual basis, up to
12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% amount is reached.
You must notify the Transfer Agent either directly or through your Dealer,
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Trust Shares -- Waiver of the
Contingent Deferred Sales Charge -- Class B Shares" in the Statement of
Additional Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES
PruArray or Smartpath Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray and SmartPath Programs.
CONVERSION FEATURE -- CLASS B SHARES
Class B shares of a Portfolio will automatically convert to Class A shares
of the same Portfolio 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 Trust tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the "Eligible Shares") will
be determined on each conversion date in accordance with the following formula:
(i) the ratio of (a) the amounts paid for Class B shares of a Portfolio
purchased at least seven years prior to the conversion date to (b) the total
amount paid for all Class B shares of the same Portfolio purchased and then held
in your account (ii) multiplied by the total number of
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<PAGE> 55
Class B shares of that Portfolio purchased and then held in your account. Each
time any Eligible Shares of a Portfolio in your account convert to Class A
shares, all shares or amounts representing Class B shares of the same Portfolio
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 of a Portfolio were initially
purchased at $10 per share (for a total of $1,000) and a second purchase of 100
shares of the same Portfolio was subsequently made at $11 per share (for a total
of $1,100), 95.24 shares of that Portfolio would convert approximately seven
years from the initial purchase (i.e., $1,000 divided by $2,100 or 47.62%
multiplied by 200 shares or 95.24 shares). The Manager reserves the right to
modify the formula for determining the number of Eligible Shares in the future
as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares of the same Portfolio at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "Net Asset Value."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares of a Portfolio will not constitute "preferential dividends" under the
Internal Revenue Code and (ii) that the conversion of shares does not constitute
a taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Portfolios will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE TRUST YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM
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<PAGE> 56
INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES OF A PORTFOLIO MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales
charge will be imposed at the time of exchange. Any applicable CDSC payable upon
the redemption of shares exchanged will be that imposed by the fund in which
shares are initially purchased and will be calculated from the first day of the
month after the initial purchase, excluding the time shares were held in a money
market fund. Class B and Class C shares may not be exchanged into money market
funds other than Prudential Special Money Market Fund, Inc. For purposes of
calculating the holding period applicable to the Class B conversion feature, the
time period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature -- Class B Shares." An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account -- Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the
Trust at (800) 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 TRUST 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. (The Trust or its agents could be subject to
liability if they fail to employ reasonable procedures.) All exchanges will be
made on the basis of the relative NAV of the two funds next determined after the
request is received in good order.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan -- Class A Shares -- Reduction and Waiver of Initial Sales
Charges" above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan -- Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares of a Portfolio
which are not subject to a CDSC held in such a shareholder's account will be
automatically exchanged for Class A shares of that Portfolio for shareholders
who qualify to purchase Class A shares at NAV on a quarterly basis, unless the
shareholder elects otherwise. Similarly, shareholders who qualify to purchase
Class Z shares of a Portfolio, will have their Class B and Class C shares of
that Portfolio
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<PAGE> 57
which are not subject to a CDSC and their Class A shares of that Portfolio
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another Dealer that they are eligible for this special exchange privilege.
Participants in any fee-based program for which a Portfolio is an available
option will have their Class A shares, if any, exchanged for Class Z shares of
the Portfolio 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 of the Portfolio at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Portfolios and the other Prudential Mutual Funds are
not intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Trust reserves the right to refuse purchase orders and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading ("Market Timers").
To implement this authority to protect the Portfolios and their
shareholders from excessive trading, the Trust will reject all exchanges and
purchases from a Market Timer unless the Market Timer has entered into a written
agreement with the Trust or its affiliates pursuant to which the Market Timer
has agreed to abide by certain procedures, which include a daily dollar limit on
trading. The Trust may notify the Market Timer of rejection of an exchange or
purchase order subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Portfolios,
you can take advantage of the following additional services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the relevant Portfolio at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent dividends
and/or distributions sent in cash rather than reinvested. If you hold shares
through your Dealer, you should contact your Dealer.
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<PAGE> 58
- AUTOMATIC SAVINGS ACCUMULATION PLAN ("ASAP"). Under ASAP you may make
regular purchases of a Portfolio's shares in amounts as little as $50 via an
automatic debit to a bank account or brokerage account (including a Command
Account). For additional information about this service, you may contact the
Distributor, your Dealer or the Transfer Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7)of the Internal Revenue Code are
available through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction of
accounts by participants, or a pooled account arrangement. Information regarding
the establishment of these plans, the administration, custodial fees and other
details is available from your Dealer or the Transfer Agent. If you are
considering adopting such a plan, you should consult with your own legal or tax
adviser with respect to the establishment and maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares of a Portfolio may be subject to a CDSC. See "How to
Sell Your Shares -- Contingent Deferred Sales Charges." See also "Shareholder
Investment Account -- Systematic Withdrawal Plan" in the Statement of Additional
Information.
- REPORTS TO SHAREHOLDERS. The Trust will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Trust will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) (toll-free) or by writing to the Trust at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In
addition, monthly unaudited financial data are available upon request from the
Trust.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Trust at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) (toll-free) or, from outside the U.S.A. at (732)
(collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
Each Portfolio has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, each
Portfolio will not be subject to federal income taxes on its net investment
income and net capital gains (i.e., the excess of net long-term capital gains
over net short-term capital losses), if any, that it distributes to its
shareholders.
Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders will be taxable as
ordinary income to the shareholder whether or not reinvested. To the extent a
Portfolio's income is derived from certain dividends received from domestic
corporations, a portion of the dividends paid to corporate shareholders of the
Portfolio will be eligible for the 70%
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dividends received deduction. Any net capital gains distributed to shareholders
will be taxable as long-term capital gains to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individual shareholders
is currently 20%. The maximum tax rate for ordinary income is 39.6%. The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or additional shares.
In addition, certain dividends declared by the Trust will be treated as received
by shareholders on December 31 of the year the dividends are declared. This rule
applies to dividends declared by the Trust in October, November or December of a
calendar year, payable to shareholders of record on a date in any such month, if
such dividends are paid during January of the following calendar year.
Dividends attributable to the net investment income of each Portfolio will
be declared and paid quarterly with respect to the Conservative Growth
Portfolio, semi-annually with respect to the Moderate Growth Portfolio and
annually with respect to the Aggressive Growth Portfolio. Distributions of any
net realized long-term and short-term capital gains earned by a Portfolio will
be made at least annually. Dividends paid by each Portfolio with respect to each
class of shares, to the extent any dividends are paid, will be calculated in the
same manner, at the same time, on the same day and will be in the same amount
except that each class (other than Class Z) will bear its own distribution
and/or service fee charges, generally resulting in lower dividends for Class B
and Class C shares in relation to Class A and Class Z shares and lower dividends
for Class A shares in relation to Class Z shares. Distribution of net capital
gains, if any, will be paid in the same amount per share for each class of
shares of a Portfolio. See "Net Asset Value."
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, will be treated as a
long-term capital loss to the extent of any capital gain distributions received
by the shareholder. Gain or loss on shares held more than 12 months will be
considered in determining a holder's adjusted net capital gain subject to a
maximum tax rate of 20%. Additionally, a capital loss realized upon a sale or
redemption of shares in a Portfolio will be deferred under the "wash sale" rules
of the Internal Revenue Code if the shareholder acquires shares in such
Portfolio during the 61-day period beginning 30 days before and ending 30 days
after the sale which gave rise to the loss.
Net investment income or capital gains earned by the Portfolios from
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Portfolios to a reduced rate of tax or exemption from
tax on this related income and gains. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the Portfolios'
assets to be invested within various countries is not known. The Portfolios
intend to operate so as to qualify for treaty-reduced rates of tax where
applicable. Furthermore, if a Portfolio qualifies as a regulated investment
company, if certain distribution requirements are satisfied, and if more than
50% of the value of the Portfolio's assets at the close of the taxable year
consists of stocks or securities of foreign corporations, the Portfolio may
elect, for U.S. federal income tax purposes, to treat foreign income taxes paid
by the Portfolio
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that can be treated as income taxes under U.S. income tax principles as paid by
its shareholders. If the Portfolio were to make an election, an amount equal to
the foreign income taxes paid by the Portfolio would be included in the income
of its shareholders and the shareholders would be entitled to credit their
portions of this amount against their U.S. tax liabilities, if any, or to deduct
such portions from their U.S. taxable income, if any. Shortly after any year for
which it makes an election, the Portfolio will report to its shareholders, in
writing, the amount per share of foreign tax that must be included in each
shareholder's gross income and the amount which will be available for deduction
or credit. No deduction for foreign taxes may be claimed by a non-corporate
shareholder who does not itemize deductions. Certain limitations will be imposed
on the extent to which the credit for foreign taxes may be claimed. As a result
of the election, shareholders who are non-resident alien individuals or foreign
entities may be subject to additional U.S. withholding tax on the foreign taxes
deemed distributed pursuant thereto, but be unable to claim a deduction or
credit for such taxes in the U.S. It is not anticipated that any Portfolio will
satisfy the requirements for making the election to treat shareholders as having
paid foreign taxes paid by the Portfolio.
A Portfolio may, from time to time, invest in Passive Foreign Investment
Companies ("PFICs"). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, a Portfolio's investments
in PFICs are subject to special tax provisions that may result in the taxation
of certain gains realized and unrealized by the Portfolio.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by a Portfolio will be required to be "marked
to market" for federal income tax purposes; that is, treated as having been sold
at market value. Sixty percent of any gain or loss recognized on these "deemed
sales" and on actual dispositions may be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss. See
"Taxes, Dividends and Distributions" in the Statement of Additional Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition may be
treated as ordinary gain or loss. These gains or losses increase or decrease the
amount of a Portfolio's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Portfolio's net capital gain. If currency
fluctuation losses exceed other investment company taxable income during a
taxable year, distributions made by the Portfolio during the year would be
characterized as a return of capital to shareholders, reducing the shareholder's
basis in their Portfolio shares.
Under the Internal Revenue Code, each Portfolio is required to withhold and
remit to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds on the accounts of certain shareholders who fail to furnish their
correct tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case
of certain foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law, or otherwise are subject
to backup withholding.
Any dividends out of net investment income and short-term capital gains
paid to a foreign shareholder will generally be subject to U.S. withholding tax
of 30% (or lower treaty rate if applicable).
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As a result of the allocation and any reallocation of assets among the
Advisers of each of the Portfolios, there may be tax ramifications relating to
the sale of assets in the form of increased short-term or long-term capital
gains. As described above, net short-term gains derived by a Portfolio are taxed
as ordinary income. Additionally, Portfolios may also be subject to the "wash
sale" rules of the Internal Revenue Code as described above.
Dividends and distributions will be paid in additional Portfolio shares, at
net asset value computed on the payment date and record date, respectively, or
such other date as the Trustees may determine, unless the shareholder elects in
writing not less than five business days prior to the record date to receive
such dividends and distributions in cash. Such election should be submitted to
the Trust or the investor's financial advisor. Each Portfolio will notify each
shareholder after the close of each Portfolio's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions.
If you buy shares on or immediately before the record date (the date that
determines who receives the dividend), you will receive a portion of the money
you invested as a taxable dividend. Therefore you should consider the timing of
dividends when buying shares of a Portfolio.
The foregoing is a general summary of the U.S. federal income tax
consequences of investing in a Portfolio. Shareholders are advised to consult
their own tax advisers regarding specific questions as to federal, state, local
or foreign taxes. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
GENERAL INFORMATION
PERFORMANCE INFORMATION
FROM TIME TO TIME THE TRUST MAY ADVERTISE A PORTFOLIO'S AVERAGE ANNUAL
TOTAL RETURN AND AGGREGATE TOTAL RETURN IN ADVERTISEMENTS OR SALES LITERATURE.
These figures are based on historical earnings and are not intended to indicate
future performance. The total return shows how much an investment in a Portfolio
of the Trust would have increased (decreased) over a specified period of time
(i.e., one, five or ten years or since inception of the Portfolio) assuming that
all distributions and dividends paid by the Portfolio were reinvested on the
reinvestment dates during the period and less all recurring fees. The aggregate
total return reflects actual performance over a stated period of time. Average
annual total return is a hypothetical rate of return that, if achieved annually,
would have produced the same aggregate total return if performance had been
constant over the entire period. Average annual total return smooths out
variations in performance. Neither average annual total return nor aggregate
total return takes into account any federal or state income taxes which may be
payable upon redemption. The Trust may also include comparative performance
information for its Portfolios in advertising or marketing the Trust's shares.
Such performance information may include data from Lipper Analytical Services,
Inc., Morningstar Publications, Inc., other industry publications, business
periodicals, and market indices. See "Performance Information" in the Statement
of Additional Information. Further performance information is contained in the
Trust's annual report to shareholders which is available without charge. You may
request copies of such reports by calling (800) or by writing to the
Trust at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077.
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DESCRIPTION OF SHARES
The Trust, organized as an unincorporated business trust on July 29, 1998
under the laws of Delaware, is an entity of the type commonly known as a
"business trust."
The shareholders of the Portfolios are each entitled to a full vote for
each full share of beneficial interest (par value $.001 per share) held (and
fractional votes for fractional shares). Shares of each Portfolio are entitled
to vote as a class only to the extent required by the provisions of the
Investment Company Act or as otherwise permitted by the Trustees in their sole
discretion. Pursuant to the Investment Company Act, shareholders of each
Portfolio have to approve changes in certain investment policies of a Portfolio.
It is the intention of the Trust not to hold Annual Meetings of
Shareholders. The Trustees may call Special Meetings of Shareholders for action
by shareholder vote as may be required by the Investment Company Act or the
Declaration of Trust. Shareholders have certain rights, including the right to
call a meeting upon a vote of 10% of the Trust's outstanding shares for the
purpose of voting on the removal of one or more Trustees. The Trust may from
time to time, in its discretion and pursuant to applicable regulations, add
additional Portfolios to the Trust or, with the approval of the Shareholders of
an existing Portfolio, if necessary, terminate one or more of the Portfolios.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian for the Trust's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Trust. Its mailing address is P.O.
Box 9131, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC ("PMFS"), Raritan Plaza One, Edison,
New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Trust. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Trust with the Commission
under the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the Commission or may be examined, without
charge, at the office of the Commission in Washington, D.C.
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<PAGE> 63
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Trust or the Distributor. This Prospectus does not constitute
an offer by the Trust or by the Distributor to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PORTFOLIO HIGHLIGHTS........................ 2
Trust Expenses.............................. 5
Financial Highlights........................ 6
Description of the Portfolios............... 11
Investment Objectives and Policies........ 11
Other Investments and Policies............ 18
Investment Restrictions................... 34
Management of the Trust..................... 34
Manager................................... 34
Advisers.................................. 36
Distributor............................... 37
Portfolio Transactions.................... 38
Year 2000................................. 39
Net Asset Value............................. 39
SHAREHOLDER GUIDE........................... 39
How to Buy Shares of the Fund............. 39
Alternative Purchase Plan................. 41
Conversion Feature -- Class B Shares...... 50
How to Exchange Your Shares................. 51
Shareholder Services........................ 53
Taxes, Dividends and Distributions.......... 54
General Information......................... 57
Performance Information................... 57
Description of Shares..................... 58
Custodian and Transfer and Dividend
Disbursing Agent........................ 58
Additional Information.................... 58
</TABLE>
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[Add PMF #]
<TABLE>
<S> <C>
CUSIP NOS.:
Conservative Growth Portfolio --
Moderate Growth Portfolio --
Aggressive Growth Portfolio --
</TABLE>
[LOGO]
PRUDENTIAL DIVERSIFIED SERIESSM
PROSPECTUS
OCTOBER 1, 1998
<PAGE> 64
PRUDENTIAL DIVERSIFIED SERIES(SM)
Statement of Additional Information
October 1, 1998
Prudential Diversified Series(SM) (the "Trust") is an open-end, management
investment company currently composed of three separate investment portfolios
(the "Portfolios") professionally managed by Prudential Investments Fund
Management LLC ("PIFM" or the "Manager"). Each Portfolio benefits from
discretionary advisory services provided by several highly regarded sub-advisers
(each, an "Adviser," collectively, the "Advisers") identified, retained,
supervised and compensated by the Manager. The Trust consists of the following
three Portfolios:
- Prudential Diversified Conservative Growth Portfolio (the "Conservative
Growth Portfolio")
- Prudential Diversified Moderate Growth Portfolio(the "Moderate Growth
Portfolio")
- Prudential Diversified Aggressive Growth Portfolio(the "Aggressive Growth
Portfolio")
The Trust's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) .
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Trust's Prospectus dated October 1, 1998, a copy of
which may be obtained from the Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<S> <C> <C>
Investment Policies......................................... B-2 13
Additional Investment Information........................... B-2 22
Investment Restrictions..................................... B-20 42
Trustees and Officers....................................... B-21 42
Manager..................................................... B-23 42
Advisers.................................................... B-26 44
Distributor................................................. B-26 50
Portfolio Transactions and Brokerage........................ B-27 50
Purchase and Redemption of Shares........................... B-29 52
Shareholder Investment Account.............................. B-32 55
Net Asset Value............................................. B-37 51
Taxes, Dividends and Distributions.......................... B-38 55
Performance Information..................................... B-40 58
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants................................... B-40 59
Financial Statements........................................ --
Appendix I -- Description of Security Ratings............... I-1
Appendix II -- Historical Performance Data.................. II-1
Appendix III -- General Investment Information.............. III-1
Appendix IV -- Information Relating to Prudential........... IV-1
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE> 65
INVESTMENT POLICIES
ADDITIONAL INVESTMENT INFORMATION
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in U.S. Government securities.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Portfolio may purchase mortgage-related
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including GNMA, FNMA and FHLMC Certificates. See
"Mortgage-Backed Securities" below. Mortgages backing the securities which may
be purchased by a Portfolio include conventional thirty-year fixed-rate
mortgages, graduated payment mortgages, fifteen-year mortgages, adjustable rate
mortgages and balloon payment mortgages. A balloon payment mortgage backed
security is an amortized mortgage security with installments of principal and
interest, the last installment of which is predominantly principal. All of these
mortgages can be used to create pass-through securities. A pass-through security
is formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an undivided mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. The remaining expected average life of a pool of
mortgage loans underlying a mortgage backed security is a prediction of when the
mortgage loans will be repaid and is based upon a variety of factors, such as
the demographic and geographic characteristics of the borrowers and the
mortgaged properties, the length of time that each of the mortgage loans has
been outstanding, the interest rates payable on the mortgage loans and the
current interest rate environment.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage backed securities can be expected to accelerate. When
mortgage obligations are prepaid, a Portfolio reinvests the prepaid amounts in
securities, the yields which reflect interest rates prevailing at that time.
Therefore, a Portfolio's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages are reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium generally will result in capital losses.
During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending the
projected average maturity of the mortgage-backed securities. This maturity
extension risk may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short- or intermediate-term securities.
SPECIAL CONSIDERATIONS. Fixed-income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed-rate U.S. Government securities generally rise. 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 maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they may affect the net
asset value of a Portfolio.
At a time when a Portfolio has written call options on a portion of its
U.S. Government securities, its ability to profit from declining interest rates
will be limited. Any appreciation in the value of the securities
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held in the Portfolio above the strike price would likely be partially or wholly
offset by unrealized losses on call options written by a Portfolio. The
termination of option positions under these conditions would generally result in
the realization of capital losses, which would reduce a Portfolio's capital
gains distribution. Accordingly, a Portfolio would generally seek to realize
capital gains to offset realized losses by selling portfolio securities. In such
circumstances, however, it is likely that the proceeds of such sales would be
reinvested in lower yielding securities. See "Additional Risks -- Options
Transactions and Related Risks."
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the mortgage-backed securities purchased by
the Portfolios evidence an interest in a specific pool of mortgages. Such
securities are issued by GNMA, FNMA and FHLMC.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities which evidence
an undivided interest in a pool or pools of mortgages. GNMA Certificates that
the Portfolios purchase are the "modified pass-through" type, which entitle the
holder to receive timely payment of all interest and principal payments due on
the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of
whether or not the mortgagor actually makes the payment. The GNMA Certificates
will represent a pro rata interest in one or more pools of the following types
of mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one-to-four family housing
units.
FNMA CERTIFICATES. The Federal National Mortgage Association ("FNMA") is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. FNMA provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. FNMA acquires
funds to purchase home mortgage loans from many capital market investors that
may not ordinarily invest in mortgage loans directly.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation ("FHLMC") is
a corporate instrumentality of the United States created pursuant to the
Emergency Home Finance Act of 1970, as
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amended (the "FHLMC Act"). Its purpose is to promote development of a nationwide
secondary market in conventional residential mortgages. The principal activity
of FHLMC consists of the purchase of first lien, conventional, residential
mortgage loans and participation interests in such mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
FHLMC Certificates.
FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owned on the underlying
pool. FHLMC guarantees timely monthly payment of interest on PCs and the
ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FHLMC CERTIFICATES. FHLMC guarantees to each registered holder of the
FHLMC Certificate the timely payment of interest at the rate provided for by
such FHLMC Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate ultimate collection of all principal on
the related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. FHLMC may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than 30 days
following (i) foreclosure sale, (ii) payment of a claim by any mortgage insurer
or (iii) the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. The obligations of FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by the full
faith and credit of the U.S. Government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if such
mortgage securities are purchased at a discount, an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMs") are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal. However, the major difference between ARMs and
fixed rate mortgage securities is that the interest rate and the rate of
amortization of principal of ARMs can and do change in accordance with movements
in a particular, pre-specified, published interest rate index.
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The amount of interest on an ARM is calculated by adding a specified
amount, the "margin," to the index, subject to limitations on the maximum and
minimum interest that can be charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. Because the interest rate on ARMs generally moves in the same direction
as market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.
There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds index (often
related to ARMs issued by FNMA), tend to lag changes in market rate levels and
tend to be somewhat less volatile.
COLLATERALIZED MORTGAGE OBLIGATIONS. In reliance on a Securities and
Exchange Commission (the "Commission") interpretation, a Portfolio's investments
in certain qualifying collateralized mortgage obligations ("CMOs"), including
CMOs that have elected to be treated as real estate mortgage investment conduits
("REMICs"), are not subject to the Investment Company Act's limitation on
acquiring interests in other Investment companies. In order to be able to rely
on the Commission's interpretation, the CMOs and REMICs must be unmanaged,
fixed-asset issuers, that (a) invest primarily in mortgage-backed securities,
(b) do not issue redeemable securities, (c) operate under general exemptive
orders exempting them from all provisions of the Investment Company Act and (d)
are not registered or regulated under the Investment Company Act as investment
companies. To the extent that a Portfolio selects CMOs or REMICs that do not
meet the above requirements, the Portfolio may not invest more than 10% of its
assets in all such entities, may not invest more than 5% of its total assets in
a single entity, and may not acquire more than 3% of the voting securities of
any single such entity.
OTHER INVESTMENTS
CUSTODIAL RECEIPTS. Each Portfolio may purchase obligations issued or
guaranteed as to principal and interest by the U.S. Government 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 known by various names, including "Treasury Receipts," "Treasury
Investment Growth Receipts" ("TIGRs") and "Certificates of Accrual on Treasury
Securities" ("CATS"). Each Portfolio will not invest more than 5% of its net
assets in such custodial receipts.
LOAN PARTICIPATIONS. Each of the Conservative Growth and Moderate Growth
Portfolios may invest up to 5% of its net assets in high quality participation
interests having remaining maturities not exceeding one year in loans extended
by banks to United States and foreign companies. In a typical corporate loan
syndication, a number of lenders, usually banks ("co-lenders"), lend a corporate
borrower a specified sum pursuant to the terms and conditions of a loan
agreement. One of the co-lenders usually agrees to act as the agent bank with
respect to the loan. The loan agreement among the corporate borrower and the
co-lenders identifies the agent bank as well as sets forth the rights and duties
of the parties. The agreement often (but not always) provides for the
collateralization of the corporate borrower's obligations thereunder and
includes various types of restrictive covenants which must be met by the
borrower.
The participation interests acquired by a Portfolio may, depending on the
transaction, take the form of a direct or co-lending relationship with the
corporate borrower, an assignment of an interest in the loan by a co-lender or
another participant, or a participation in the seller's share of the loan.
Typically, the Portfolio will look to the agent bank to collect principal of and
interest on a participation interest, to
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monitor compliance with loan covenants, to enforce all credit remedies, such as
foreclosures on collateral, and to notify co-lenders of any adverse changes in
the borrower's financial condition or declarations of insolvency. The agent bank
in such cases will be qualified to serve as a custodian for a registered
investment company such as the Trust. The agent bank is compensated for these
services by the borrower pursuant to the terms of the loan agreement.
When a Portfolio acts as co-lender in connection with a participation
interest or when the Portfolio acquires a participation interest the terms of
which provide that the Portfolio will be in privity with the corporate borrower,
the Portfolio will have direct recourse against the borrower in the event the
borrower fails to pay scheduled principal and interest. In cases where the
Portfolio lacks such direct recourse, the Portfolio will look to the agent bank
to enforce appropriate credit remedies against the borrower.
The Portfolios believe that the principal credit risk associated with
acquiring participation interests from a co-lender or another participant is the
credit risk associated with the underlying corporate borrower. A Portfolio may
incur additional credit risk, however, when a Portfolio is in the position of
participant rather than a co-lender because the Portfolio must assume the risk
of insolvency of the co-lender from which the participation interest was
acquired and that of any person interpositioned between the Portfolio and the
co-lender. However, in acquiring participation interests, the Portfolio will
conduct analysis and evaluation of the financial condition of each such
co-lender and participant to ensure that the participation interest meets the
Portfolio's high quality standard and will continue to do so as long as it holds
a participation. For purposes of a Portfolio's requirement to maintain
diversification for tax purposes, the issuer of a loan participation will be the
underlying borrower. In cases where a Portfolio does not have recourse directly
against the borrower, both the borrower and each agent bank and co-lender
interposed between the Portfolio and the borrower will be deemed issuers of the
loan participation for tax diversification purposes.
For purposes of each Portfolio's fundamental investment restriction against
investing 25% or more of its total assets in any one industry, a Portfolio will
consider all relevant factors in determining who is the issuer of a loan
participation including the credit quality of the underlying borrower, the
amount and quality of the collateral, the terms of the loan participation
agreement and other relevant agreements (including any intercreditor
agreements), the degree to which the credit of such intermediary was deemed
material to the decision to purchase the loan participation, the interest
environment, and general economic conditions applicable to the borrower and such
intermediary.
COMMERCIAL PAPER. Each Portfolio may invest in commercial paper.
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. A variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving periodically
fluctuating rates of interest under a letter agreement between a commercial
paper issuer and an institutional lender pursuant to which the lender may
determine to invest varying amounts.
ADDITIONAL RISKS
OPTIONS TRANSACTIONS AND RELATED RISKS
The Portfolios may each purchase put and call options and sell covered put
and call options which are traded on national securities exchanges and may also
engage in over-the-counter options transactions with recognized United States
securities dealers ("OTC Options").
OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the exercise price or strike price). By writing a call option,
the Portfolio becomes obligated during the term of the option, upon exercise of
the option, to deliver the underlying securities or a specified amount of cash
to the purchaser against receipt of the exercise price. When a Portfolio writes
a call option, the Portfolio loses the potential for gain on the underlying
securities in excess of the exercise price of the option during the period that
the option is open.
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The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Portfolio becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.
The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by an
increase and, in the case of a covered put option, by a decline in the market
value of the underlying security during the option period.
A Portfolio may wish to protect certain portfolio securities against a
decline in market value at a time when put options on those particular
securities are not available for purchase. The Portfolio may therefore purchase
a put option on other carefully selected securities, the values of which the
Adviser expects will have a high degree of positive correlation to the values of
such portfolio securities. If the Adviser's judgment is correct, changes in the
value of the put options should generally offset changes in the value of the
portfolio securities being hedged. If the Adviser's judgment is not correct, the
value of the securities underlying the put option may decrease less than the
value of the Portfolio's investments and therefore the put option may not
provide complete protection against a decline in the value of the Portfolio's
investments below the level sought to be protected by the put option.
A Portfolio may similarly wish to hedge against appreciation in the value
of debt securities that it intends to acquire at a time when call options on
such securities are not available. The Portfolio may, therefore, purchase call
options on other carefully selected debt securities the values of which the
Adviser expects will have a high degree of positive correlation to the values of
the debt securities that the Portfolio intends to acquire. In such circumstances
the Portfolio will be subject to risks analogous to those summarized above in
the event that the correlation between the value of call options so purchased
and the value of the securities intended to be acquired by the Portfolio is not
as close as anticipated and the value of the securities underlying the call
options increases less than the value of the securities to be acquired by the
Portfolio.
A Portfolio may write options on securities in connection with
buy-and-write transactions; that is, the Portfolio may purchase a security and
concurrently write a call option against that security. If the call option is
exercised, the Portfolio's maximum gain will be the premium it received for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price of the option.
If the option is not exercised and the price of the underlying security
declines, the amount of the decline will be offset in part, or entirely, by the
premium received.
The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call option is exercised in such a transaction, the
Portfolio's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between the Portfolio's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of the decline will be offset in part, or entirely, by the premium
received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the
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purchase is that the writer's position will be cancelled by the exchange's
affiliated clearing organization. Likewise, an investor who is the holder of an
exchange-traded option may liquidate a position by effecting a "closing sale
transaction" 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.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Portfolio and its counter-party with no clearing
organization guarantee. Thus, when the Portfolio purchases an OTC option, it
relies on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Portfolio as well as the
loss of the expected benefit of the transaction. The Trustees will approve a
list of dealers with which the Portfolios may engage in OTC options.
When a Portfolio writes an OTC option, it generally will be able to close
out the OTC options prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Portfolio originally wrote the
OTC option. While the Portfolio will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Portfolio, there can be no assurance that the Portfolio
will be able to liquidate an OTC option at a favorable price at any time prior
to expiration. Until the Portfolio is able to effect a closing purchase
transaction in a covered OTC call option the Portfolio has written, it will not
be able to liquidate securities used as cover until the option expires or is
exercised or different cover is substituted. In the event of insolvency of the
counterparty, the Portfolio may be unable to liquidate an OTC option.
OTC options purchased by a Portfolio will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Portfolio will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the
Portfolio may repurchase any OTC options it writes for a maximum price to be
calculated by a formula set forth in the option agreement. The "cover" for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Each Portfolio may write only "covered" options. A call option written by
the Portfolio is "covered" if the Portfolio owns the security underlying the
option or has an absolute and immediate right to acquire that security without
additional consideration (or for additional consideration segregated by its
Custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Portfolio holds on a
share-for-share basis a call on the same security as the call written where the
exercise price of the call held is equal to or less than the exercise price of
the call written; where the exercise price of the call held is greater than the
exercise price of the call written, the Portfolio will segregate cash or other
liquid assets with its Custodian. A put option written by the Portfolio is
"covered" if the Portfolio holds on a share-for-share basis a put on the same
security as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written; otherwise the Portfolio
will segregate cash or other liquid assets with its Custodian equivalent in
value to the exercise price of the option. This means that so long as the
Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option or an option to purchase the same
underlying securities, having an exercise price equal to or less than the
exercise price of the "covered" option, or will segregate with its Custodian for
the term of the option cash or other liquid assets having a value equal to or
greater than the exercise price of the option. In the case of a straddle written
by the Portfolio, the amount segregated will equal the amount, if any, by which
the put is "in-the-money."
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any exchange. However, each Portfolio may each purchase and
write such options should they commence trading on any exchange and may purchase
or write OTC Options on GNMA certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Portfolio, as a writer of a covered
GNMA call holding GNMA Certificates as
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"cover" to satisfy its delivery obligation in the event of assignment of an
exercise notice, may find that its GNMA Certificates no longer have a sufficient
remaining principal balance for this purpose. Should this occur, the Portfolio
will enter into a closing purchase transaction or will purchase additional GNMA
Certificates from the same pool (if obtainable) or replacement GNMA Certificates
in the cash market in order to remain covered.
A GNMA Certificate held by a Portfolio to cover an option position in any
but the nearest expiration month may cease to represent cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Portfolio will no longer be covered, and the Portfolio will either enter
into a closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Portfolio closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the Portfolio 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 exchange-traded
options, no secondary market on an exchange may exist. In such event, it might
not be possible to effect closing transactions in particular options, with the
result that the Portfolio would have to exercise its exchange-traded options in
order to realize any profit and may incur transaction costs in connection
therewith. If the Portfolio 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.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date, to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
In the event of the bankruptcy of a broker through which the Portfolio
engages in options transactions, the Portfolio could experience delays and/or
losses in liquidating open positions purchased or sold through the broker and/or
incur a loss of all or part of its margin deposits with the broker. Similarly,
in the event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
OPTIONS ON SECURITIES INDICES. Each Portfolio may purchase and write call
and put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Portfolio owns or intends
to purchase, and not for speculation. Through the writing or purchase of
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index options, the Portfolio can achieve many of the same objectives as through
the use of options on individual securities. Options on securities indices are
similar to options on a security 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. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the Portfolio owns or intends to purchase will probably not
correlate perfectly with movements in the level of an index and, therefore, the
Portfolio bears the risk that a loss on an index option would not be completely
offset by movements in the price of such securities.
When a Portfolio writes an option on a securities index, it will be
required to deposit with its custodian, and mark-to-market, eligible securities
equal in value to 100% of the exercise price in the case of a put, or the
contract value in the case of a call. In addition, where the Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Portfolio may expire worthless, in which case the Portfolio
would lose the premium paid therefor.
RISKS OF OPTIONS ON INDICES. A Portfolio's purchase and sale of options on
indices will be subject to risks described above under "Risks of Options
Transactions." In addition, the distinctive characteristics of options on
indices create certain risks that are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Portfolio 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 Portfolio. It is the policy of each
Portfolio to purchase or write options only on indices which include a number of
stocks sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. A
Portfolio will not purchase or sell any index option contract unless and until,
in the Adviser's opinion, the market for such options has developed sufficiently
that the risk in connection with such transactions is not substantially greater
than the risk in connection with options on securities in the index.
SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercises of index
options are settled in cash, a call writer such as a Portfolio cannot determine
the amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, a Portfolio will write call options on indices only under the
circumstances described below under "Limitations on Purchase and Sale of Stock
Options and Options on Stock Indices, Foreign Currencies and Futures Contracts
on Foreign Currencies."
Price movements in a Portfolio's security holdings probably will not
correlate precisely with movements in the level of the index and, therefore, the
Portfolio bears the risk that the price of the securities held by the Portfolio
may not increase as much as the index. In such event, the Portfolio would bear a
loss on the call which is not completely offset by movements in the price of the
Portfolio's security
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holdings. It is also possible that the index may rise when the Portfolio's
stocks do not rise. If this occurred, the Portfolio 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 Portfolio in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless a Portfolio has other liquid assets which are sufficient to satisfy
the exercise of a call, the Portfolio 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 Portfolio fails to
anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 33 1/3% of the Portfolio's total assets) pending settlement of the
sale of securities in its portfolio and would incur interest charges thereon.
When a Portfolio has written a call, there is also a risk that the market
may decline between the time the Portfolio 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 Portfolio is able to sell stocks in its portfolio. As
with stock options, the Portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio 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 Portfolio has written is
"covered" by an index call held by the Fund with the same strike price, the
Portfolio 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 Portfolio exercises the
call it holds or the time the Portfolio sells the call which, in either case,
would occur no earlier than the day following the day the exercise notice was
filed.
If the Portfolio 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 Portfolio 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
Portfolio 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.
FUTURES CONTRACTS
Each Portfolio may each enter into futures contracts. As a purchaser of a
futures contract, a Portfolio 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 Portfolio incurs an obligation to deliver the specified amount of
the underlying obligation at a specified time in return for an agreed upon
price. A Portfolio may purchase futures contracts on debt securities, aggregates
of debt securities, financial indices and U.S. Government securities including
futures contracts or options linked to LIBOR. Eurodollar futures contracts are
currently traded on the Chicago Mercantile Exchange. They enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. A Portfolio would use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps are
linked. See the discussion of "Risks of Options Transactions."
A Portfolio 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 Adviser anticipates that
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interest rates may rise and, concomitantly, the price of the Portfolio's
securities holdings may fall, the Portfolio may sell a futures contract. If
declining interest rates are anticipated, the Portfolio may purchase a futures
contract to protect against a potential increase in the price of securities the
Portfolio intends to purchase. Subsequently, appropriate securities may be
purchased by the Portfolio 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, 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 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
Portfolio will be able to enter into a closing transaction.
When a Portfolio enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction an "initial margin" of cash or other liquid
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Portfolio upon the proper termination of
the futures contract. The margin deposits made are marked-to-market daily and
the Portfolio may be required to make subsequent deposits into the segregated
account, maintained at its Custodian for that purpose, or cash or U.S.
Government securities, called "variation margin," in the name of the broker,
which are reflective of price fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The Portfolios may each purchase call and
put options on futures contracts which are traded on an exchange and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid), and the writer 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 term of the option. Upon exercise of the option, the assumption of an
offsetting futures position 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.
A Portfolio may only write "covered" put and call options on futures
contracts. A Portfolio will be considered "covered" with respect to a call
option it writes on a futures contract if the Portfolio owns the assets which
are deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
"covered" option and having an expiration date not earlier than the expiration
date of the "covered" option, or if it segregates with its Custodian for the
term of the option cash or other liquid assets equal to the fluctuating value of
the optioned future. The Portfolio will be considered "covered" with respect to
a put option it writes on a futures contract if it owns an option to sell that
futures contract having a strike price equal to or greater than the strike price
of the "covered" option, or if it segregates with its Custodian for the term of
the
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option cash or other liquid assets at all times equal in value to the exercise
price of the put (less any initial margin deposited by the Portfolio with its
Custodian with respect to such option). There is no limitation on the amount of
the Portfolio's assets which can be segregated.
A Portfolio will purchase options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the Adviser wished
to protect against an increase in interest rates and the resulting negative
impact on the value of a portion of its U.S. Government securities holdings, it
might purchase a put option on an interest rate futures contract, the underlying
security which correlates with the portion of the securities holdings the
Adviser seeks to hedge.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. A Portfolio may
purchase or sell futures contracts or purchase related options thereon for bona
fide hedging transactions without limit. In addition, a Portfolio may use
futures contracts and options thereon for any other purpose to the extent that
the aggregate initial margin and option premium does not exceed 5% of the market
value of the Portfolio. There is no overall limitation on the percentage of the
Portfolio's assets which may be subject to a hedge position. In addition, in
accordance with the regulations of the Commodity Futures Trading Commission
("CFTC") the Portfolio is exempt from registration as a commodity pool operator.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A
Portfolio may sell a futures contract to protect against the decline in the
value of securities held by the Portfolio. However, it is possible that the
futures market may advance and the value of securities held in the Portfolio's
portfolio may decline. If this were to occur, the Portfolio would lose money on
the futures contracts and also experience a decline in value in its portfolio
securities.
If a Portfolio purchases a futures contract to hedge against the increase
in value of securities it intends to buy, and the value of such securities
decreases, then the Portfolio may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
In order to assure that the Portfolio is entering into transactions in
futures contracts for hedging purposes as such term is defined by the CFTC,
either: (1) a substantial majority (i.e., approximately 75%) of all anticipatory
hedge transactions (transactions in which the Portfolio does not own at the time
of the transaction, but expects to acquire, the securities underlying the
relevant futures contract) involving the purchase of futures contracts will be
completed by the purchase of securities which are the subject of the hedge, or
(2) the underlying value of all long positions in futures contracts will not
exceed the total value of (a) all short-term debt obligations held by the
Portfolio; (b) cash held by the Portfolio; (c) cash proceeds due to the
Portfolio on investments within thirty days; (d) the margin deposited on the
contracts; and (e) any unrealized appreciation in the value of the contracts.
If a Portfolio maintains a short position in a futures contract, it will
cover this position by segregating with its Custodian, cash or other liquid
assets equal in value (when added to any initial or variation margin on deposit)
to the market value of the securities underlying the futures contract. Such a
position may also be covered by owning the securities underlying the futures
contract, or by holding a call option permitting the Portfolio to purchase the
same contract at a price no higher than the price at which the short position
was established.
In addition, if a Portfolio holds a long position in a futures contract, it
will segregate cash or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) with its
Custodian. Alternatively, the Portfolio could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the Portfolio.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Portfolio
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would continue to be required to make daily cash payments of variation margin on
open futures positions. In such situations, if the Portfolio has insufficient
cash, it may be disadvantageous to do so. In addition, the Portfolio may be
required to take or make delivery of the instruments underlying futures
contracts it holds at a time when it is disadvantageous to do so. The ability to
close out options and futures positions could also have an adverse impact on the
Portfolio's ability to hedge its portfolio effectively.
In the event of the bankruptcy of a broker through which a Portfolio
engages in transactions in futures or options thereon, the Portfolio could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Transactions are entered into by the Portfolio only with
brokers or financial institutions deemed creditworthy by the Adviser.
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging a Portfolio's securities. One such risk
which may arise in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
futures contracts (and thereby the futures contract prices) may correlate
imperfectly with the behavior of the cash prices of the Portfolio's portfolio
securities. Another such risk is that prices of futures contracts may not move
in tandem with the changes in prevailing interest rates against which the
Portfolio seeks a hedge. A correlation may also be distorted by the fact that
the futures market is dominated by short-term traders seeking to profit from the
difference between a contract or security price objective and their cost of
borrowed funds. Such distortions are generally minor and would diminish as the
contract approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Portfolio and the movements in the prices of
the securities which are the subject of the hedge. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities and futures market could
result. Price distortions could also result if investors in futures contracts
elect to make or take delivery of underlying securities rather than engage in
closing transactions due to the resultant reduction in the liquidity of the
futures market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate trends by the Adviser may still not result in a successful hedging
transaction.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the
Portfolio notwithstanding that the purchase or sale of a futures contract would
not result in a loss, as in the instance where there is no movement in the
prices of the futures contracts or underlying U.S. Government securities.
OPTIONS ON CURRENCIES
Instead of purchasing or selling futures, options on futures or forward
currency exchange contracts, the Portfolios may each attempt to accomplish
similar objectives by purchasing put or call options on currencies either on
exchanges or in over-the-counter markets or by writing put options or covered
call options on currencies. A put option gives a Portfolio the right to sell a
currency at the exercise price until the option expires. A call option gives a
Portfolio the right to purchase a currency at the exercise price until the
option expires. Both types of options serve to insure against adverse currency
price movements in the underlying portfolio assets designated in a given
currency.
RISKS OF OPTIONS ON FOREIGN CURRENCIES. Because there are two currencies
involved, developments in either or both countries affect the values of options
on foreign currencies. Risks include those
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described in the Prospectus under "Other Investments and Policies--Risk Factors
and Special Considerations of Investing in Foreign Securities," including
government actions affecting currency valuation and the movements of currencies
from one country to another. The quantity of currency underlying option
contracts represent odd lots in a market dominated by transactions between
banks; this can mean extra transaction costs upon exercise. Option markets may
be closed while round-the-clock interbank currency markets are open, and this
can create price and rate discrepancies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Portfolios may each enter into forward foreign currency exchange
contracts in several circumstances. When a Portfolio enters into a contract for
the purchase or sale of a security denominated in a foreign currency, or when a
Portfolio anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Portfolio may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract for
a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, a Portfolio may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when an Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, a
Portfolio 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 Portfolio's securities holdings 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. A Portfolio does not intend to enter into
such forward contracts to protect the value of its portfolio securities on a
regular or continuous basis. A Portfolio does not intend to enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolio to deliver an amount
of foreign currency in excess of the value of the Portfolio's securities
holdings or other assets denominated in that currency. However, the Portfolios
believe that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of the Portfolio will
thereby be served.
A Portfolio generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Portfolio may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Portfolio is obligated to deliver, then it would be
necessary for the Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio 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 Portfolio'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 Portfolio 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
B-15
<PAGE> 79
increase, the Portfolio 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.
A Portfolio's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, a Portfolio
is not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of a Portfolio's securities holdings against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities which are unrelated to exchange rates. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
Although each Portfolio values its assets daily in terms of U.S. dollars,
it does not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK INDICES,
FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES
A Portfolio may write put and call options on stocks only if they are
covered, and such options must remain covered so long as the Portfolio is
obligated as a writer. The Portfolios will each write put options on foreign
currencies and futures contracts on foreign currencies for bona fide hedging
purposes only if there is segregated with the Portfolio's Custodian an amount of
cash or other liquid assets equal to or greater than the aggregate exercise
price of the puts. In addition, each Portfolio may use futures contracts or
related options for non-hedging or speculative purposes to the extent that
aggregate initial margin and option premiums do not exceed 5% of the market
value of the Portfolio's assets. A Portfolio will not purchase options on equity
securities or securities indices if the aggregate premiums paid for such
outstanding options would exceed 10% of its total assets.
Except as described below, a Portfolio will write call options on indices
only if on such date it holds a portfolio of stocks at least equal to the value
of the index times the multiplier times the number of contracts. When a
Portfolio writes a call option on a broadly-based stock market index, the
Portfolio will segregate with its Custodian, or pledge to a broker as collateral
for the option, cash, other liquid assets or at least one "qualified security"
with a market value at the time the option is written of not less than 100% of
the current index value times the multiplier times the number of contracts.
If a Portfolio 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, 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 Portfolio'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 Portfolio
will so segregate or pledge an amount in cash or other liquid assets equal in
value to the difference. In addition, when a Portfolio writes a call on an index
which is in-the-money at the time the call is written, the Portfolio 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
B-16
<PAGE> 80
sentence may be applied to the Portfolio'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 a Portfolio has
not written a stock call option and which has not been hedged by the Portfolio
by the sale of stock index futures. However, if the Portfolio holds a call on
the same index as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is segregated by the
Portfolio in cash or other liquid assets with its Custodian, it will not be
subject to the requirements described in this paragraph.
A Portfolio may engage in futures contracts and options on futures
transactions as a hedge against changes, resulting from market or political
conditions, in the value of the currencies to which the Portfolio is subject or
to which the Portfolio expects to be subject in connection with future
purchases. A Portfolio may engage in such transactions when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Portfolio. A Portfolio may write options on futures contracts
to realize through the receipt of premium income a greater return than would be
realized in the Portfolio's securities holdings alone.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase transactions with parties meeting
creditworthiness standards approved by the Trustees. Each Adviser will monitor
the creditworthiness of such parties, under the general supervision of the
Manager and the Trustees. In the event of a default or bankruptcy by a seller,
the Portfolio will promptly seek to liquidate the collateral. To the extent that
the proceeds from any sale of such collateral upon a default in the obligation
to repurchase are less than the repurchase price, the Portfolio will suffer a
loss.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, each Portfolio may lend
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by a Portfolio, and are at all
times secured by cash or cash equivalents, which are segregated pursuant to
applicable regulations that are equal to at least the market value, determined
daily, of the loaned securities. The advantage of such loans is that a Portfolio
continues to receive the income on the loaned securities while at the same time
earning interest on the cash amounts deposited as collateral, which will be
invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice, or
by a Portfolio on two business days' notice. If the borrower fails to deliver
the loaned securities within two days after receipt of notice, a Portfolio could
use the collateral to replace the securities while holding the borrower liable
for any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even 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 deemed
by a Portfolio's Adviser to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks. Upon termination of the
loan, the borrower is required to return the securities to a Portfolio. Any gain
or loss in the market price during the loan period would inure to a Portfolio.
The creditworthiness of firms to which a Portfolio lends its portfolio
securities will be monitored on an ongoing basis by the Adviser pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Trustees.
When voting or consent rights which accompany loaned securities pass to the
borrower, a Portfolio will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of such
rights if the matters involved would have a material effect on a Portfolio's
investment in such loaned securities. A Portfolio may pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities.
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<PAGE> 81
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, each Portfolio may
purchase securities on a when-issued or delayed delivery basis, i.e., delivery
and payment can take place a month or more after the date of the transactions.
The securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While a Portfolio will only
purchase securities on a when-issued, delayed delivery or forward commitment
basis with the intention of acquiring the securities, a Portfolio may sell the
securities before the settlement date, if it is deemed advisable. At the time a
Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, a Portfolio will record the transaction and thereafter
reflect the value, each day, of such security in determining the net asset value
of a Portfolio. At the time of delivery of the securities, the value may be more
or less than the purchase price. A Portfolio will also segregate with a
Portfolio's custodian bank cash or other liquid assets equal in value to
commitments for such when-issued or delayed delivery securities; subject to this
requirement, a Portfolio may purchase securities on such basis without limit. An
increase in the percentage of a Portfolio's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of a Portfolio's net asset value. The Manager and the Advisers do not
believe that a Portfolio's net asset value or income will be adversely affected
by a Portfolio's purchase of securities on such basis.
INTEREST RATE SWAP TRANSACTIONS
The Conservative Growth and Moderate Growth Portfolios may each enter into
either asset-based interest rate swaps or liability-based interest rate swaps,
depending on whether it is hedging its assets or its liabilities. A Portfolio
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Portfolio receiving or paying, as the
case may be, only the net amount of the two payments. Since these hedging
transactions are entered into for good faith hedging purposes and cash or other
liquid assets are segregated, the Manager and the Advisers believe such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to the borrowing restrictions applicable to each
Portfolio. The net amount of the excess, if any, of a Portfolio's obligations
over its entitlements with respect to each interest rate swap will be accrued on
a daily basis and an amount of cash or other liquid assets having an aggregate
net asset value at least equal to the accrued excess will be segregated by a
custodian that satisfies the requirements of the Investment Company Act. To the
extent that a Portfolio enters into interest rate swaps on other than a net
basis, the amount segregated will be the full amount of a Portfolio's
obligations, if any, with respect to such interest rate swaps, accrued on a
daily basis. The Portfolios will not enter into any interest rate swaps unless
the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into such transaction. If
there is a default by the other party to such a transaction, a Portfolio will
have contractual remedies pursuant to the agreement related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid.
The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of a Portfolio would diminish compared to what it would have been if
this investment technique was never used.
A Portfolio may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rates swaps is limited to the net amount of interest payments that a
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, a Portfolio's risk of loss consists of the net amount of
interest payments that a Portfolio is contractually entitled to receive. Since
interest rate swaps are individually negotiated, a Portfolio expects to achieve
an acceptable degree
B-18
<PAGE> 82
of correlation between its rights to receive interest on its portfolio
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps.
ILLIQUID SECURITIES
Each Portfolio may hold up to 15% of its net assets in illiquid securities.
Illiquid securities include repurchase agreements which have a maturity of
longer than seven days, and securities that are illiquid by virtue of the
absence of a readily available market or legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Adviser anticipates that the market for
certain restricted securities such as institutional commercial paper,
convertible securities 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 NASD.
Certain restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act are not deemed to be illiquid. The Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Advisers will consider, inter
alia, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the security and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). In addition, in order
for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (i) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations ("NRSROs"), or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the Adviser;
and (ii) it must not be "traded flat" (i.e., without accrued interest) or in
default as to principal or interest. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.
The staff of the Commission has taken the position that purchased
over-the-counter options and the assets used as "cover" for written
over-the-counter options are illiquid securities unless the Portfolio and the
counterparty have provided for the Portfolio, at the Portfolio's election, to
unwind the over-the-
B-19
<PAGE> 83
counter option. The exercise of such an option ordinarily would involve the
payment by the Portfolio of an amount designated to effect the counterparty's
economic loss from an early termination, but does allow the Portfolio to treat
the assets used as "cover" as "liquid."
SEGREGATED ASSETS
When a Portfolio is required to segregate assets in connection with certain
portfolio transactions (e.g., futures, forward contracts, reverse repurchase
agreements and dollar rolls), it will designate cash or liquid assets as
segregated with the Trust's Custodian. "Liquid assets" mean cash, U.S.
Government securities, equity securities (including foreign securities), debt
obligations or other liquid, unencumbered assets, marked-to-market daily.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a Portfolio's outstanding voting securities. The term "majority of
the outstanding voting securities" of either the Trust or a particular Portfolio
means, with respect to the approval of an investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the vote of
the lesser of (i) 67% or more of the shares of the Trust or such Portfolio
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Trust or such Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Trust or such Portfolio.
A Portfolio may not:
1. Purchase securities on margin (but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Portfolio of initial or variation
margin in connection with options or futures contracts 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 Portfolio'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 Portfolio may borrow from banks or through dollar rolls or reverse
repurchase agreements up to 33 1/3% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes, to
take advantage of investment opportunities or for the clearance of transactions
and may pledge its 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 Trust to Trustees pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets or the issuance of a senior
security subject to this restriction.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if as a result 25% or more of the
Portfolio's total assets (determined at the time of investment) would be
invested in one or more issuers having their principal business activities in
the same industry.
5. Buy or sell real estate or interests in real estate, except that the
Portfolio may purchase and sell mortgaged-backed securities, securities
collateralized by mortgages, 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.
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<PAGE> 84
6. 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. Each Portfolio may purchase restricted
securities without limit.
7. Make investments for the purpose of exercising control or management.
8. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Portfolio's total
assets. For purposes of this limitation on securities lending, the value of a
Portfolio's total assets includes the collateral received in the transactions.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer.
The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Portfolio's outstanding voting
securities.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Portfolio'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 any
Portfolio's asset coverage for borrowings falls below 300%, the Portfolio will
take prompt action to reduce its borrowings, as required by applicable law.
As a matter of non-fundamental operating policy, a Portfolio will not
purchase rights if as a result the Portfolio would then have more than 5% of its
assets (determined at the time of investment) invested in rights.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
--------------- ------------- ----------------------
<S> <C> <C>
Eugene C. Dorsey ( ) Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now Freedom
Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett Co.,
Inc.; past Chairman, Independent Sector,
Washington, D.C. (largest national coalition of
philanthropic organizations); former Chairman of
the American Council for the Arts; Director of
the advisory board of Chase Manhattan Bank of
Rochester, First Financial Fund, Inc., The High
Yield Plus Fund, Inc. and The High Yield Income
Fund, Inc.; Trustee of The Target Portfolio
Trust.
Douglas H. McCorkindale ( ) Trustee Vice Chairman (since March 1984) and President
(since September 1997) of Gannett Co. Inc.
(publishing and media), Director of Continental
Airlines, Inc., Gannett Co., Inc., Frontier
Corporation, First Financial Fund, Inc. and The
High Yield Plus Fund, Inc.; Trustee of The Target
Portfolio Trust.
</TABLE>
B-21
<PAGE> 85
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
--------------- ------------- ----------------------
<S> <C> <C>
Thomas T. Mooney ( ) Trustee President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; Trustee
of Center for Governmental Research, Inc.;
Director of Blue Cross of Rochester, The Business
Council of New York State, Executive Service
Corps of Rochester, Monroe County Water
Authority, Rochester Jobs, Inc., Monroe County
Industrial Development Corporation, Northeast
Midwest Institute and The High Yield Income Fund,
Inc.; President, Director and Treasurer, First
Financial Fund, Inc. and The High Yield Plus
Fund, Inc.; Trustee of The Target Portfolio
Trust.
*Richard A. Redeker ( ) President and Employee of Prudential Investments; formerly
751 Broad Street Trustee President, Chief Executive Officer and Director
Newark, New Jersey 07102 (October 1993-September 1996) of Prudential
Mutual Fund Management, Inc., Executive Vice
President, Director and Member of Operating
Committee (October 1993-September 1996) of
Prudential Securities, Director (October 1993-
September 1996) of Prudential Securities Group,
Inc. (PSG), Executive Vice President, The
Prudential Investment Corporation (January 1994-
September 1996), Director (January 1994-
September 1996), Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund
Services, Inc., and Senior Executive Vice
President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993);
President and Director of The High Yield Income
Fund, Inc.; President and Trustee of The Target
Portfolio Trust.
Grace C. Torres ( ) Treasurer and First Vice President (since December 1996) of PIFM;
Principal First Vice President (since March 1994) of
Financial and Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc. and Vice
President (July 1989-March 1994) of Bankers Trust
Corporation.
S. Jane Rose ( ) Secretary Senior Vice President (since December 1996) of
PIFM; Senior Vice President and Senior Counsel
(since July 1992) of Prudential Securities;
formerly Senior Vice President (January
1991-September 1996) and Senior Counsel (June
1987-September 1996) of Prudential Mutual Fund
Management, Inc.
David F. Connor (34) Assistant Assistant General Counsel (since March 1998) of
Secretary PIFM; Associate Attorney, Drinker Biddle & Reath
LLP prior thereto.
</TABLE>
B-22
<PAGE> 86
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
--------------- ------------- ----------------------
<S> <C> <C>
Stephen M. Ungerman ( ) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments and the Private Asset Group of The
Prudential Insurance Company of America
(Prudential); formerly First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc. and Senior Tax
Manager (1981-January 1993) of Price Waterhouse
LLP.
</TABLE>
- ---------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities or PIFM.
(1) The addresses of the persons listed in the table above is Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, unless otherwise
noted.
Trustees and officers of the Trust are also directors, trustees and
officers of some or all of the other investment companies distributed by the
Distributor.
The officers conduct and supervise the daily business operations of the
Trust, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Mr. Dorsey is scheduled to retire on December 31,
1998.
The Trust pays each of its Trustees who is not an affiliated person of the
Manager or any Adviser annual compensation of $4,500, in addition to certain
out-of-pocket expenses. The amount of annual compensation paid to each Trustee
may change as a result of the introduction of additional funds upon the boards
of which the Trustee may be asked to serve.
Trustees may receive their Trustee's fees pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of Trustee's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an exemptive order
from the Commission, at the daily rate of return of a Portfolio. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Trust's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Trust. Mr.
Dorsey has elected to receive his Trustee's fees pursuant to the deferred fee
agreement.
Pursuant to the Management Agreement with the Trust, the Manager pays all
compensation of officers and employees of the Trust as well as the fees and
expenses of all Trustees of the Trust who are affiliated persons of the Manager.
As of October 1, 1998, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of beneficial interest of the
Portfolios.
MANAGER
The Manager of the Trust is Prudential Investments Fund Management LLC
("PIFM" or the "Manager"), Gateway Center Three, 100 Mulberry Street, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies that
comprise the Prudential Mutual Funds. See "Management of the Trust" in the
Prospectus. As of January 31, 1998, PIFM managed and/or administered open-end
and closed-end management investment companies with assets of approximately
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<PAGE> 87
$63 billion. According to the Investment Company Institute, as of December 31,
1997, the Prudential Mutual Funds was the 18th largest family of mutual funds in
the United States.
PIFM is a subsidiary of Prudential Securities Incorporated ("Prudential
Securities") and Prudential. Prudential Mutual Fund Services LLC ("PMFS" or the
"Transfer Agent"), a wholly-owned subsidiary of PIFM, serves as the transfer and
dividend disbursing 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 Trust (the "Management
Agreement"), PIFM, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations of
the Trust and the composition of the Trust's Portfolios, including the purchase,
retention, disposition and loan of securities and other assets. The Manager is
authorized to enter into subadvisory agreements for investment advisory services
in connection with the management of the Trust and each Portfolio thereof. The
Manager will continue to have responsibility for all investment advisory
services furnished pursuant to any such investment advisory agreements.
The Manager will review the performance of all Advisers, and make
recommendations to the Trustees with respect to the retention and renewal of
contracts. In connection therewith, PIFM is obligated to keep certain books and
records of the Trust. PIFM also administers the Trust's business affairs and, in
connection therewith, furnishes the Trust with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Trust's custodian, and PMFS, the
Trust's transfer and dividend disbursing agent. The management services of PIFM
for the Trust are not exclusive under the terms of the Management Agreement and
PIFM is free to, and does, render management services to others.
The following table sets forth the annual management fee rates currently
paid by each Portfolio to PIFM pursuant to the Management Agreement, and the
amount of such fees retained by PIFM, each expressed as a percentage of the
Portfolio's average daily net assets:
<TABLE>
<CAPTION>
TOTAL AMOUNT RETAINED
PORTFOLIO MANAGEMENT FEE BY MANAGER
--------- -------------- ---------------
<S> <C> <C>
Conservative Growth Portfolio............................ .75% %
Moderate Growth Portfolio................................ .75% %
Aggressive Growth Portfolio.............................. .75% %
</TABLE>
The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Trust (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 Trust'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 Trust'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 Trust. No jurisdiction
currently limits the Trust's expenses.
In connection with its management of the business affairs of the Trust,
PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Trust's personnel
except the fees and expenses of Trustees who are not affiliated persons of PIFM
or any Adviser;
(b) all expenses incurred by PIFM or by the Trust in connection with
managing the ordinary course of the Trust's business, other than those assumed
by the Trust as described below; and
(c) the fees payable to each Adviser pursuant to the subadvisory agreements
between PIFM and each Adviser (the "Advisory Agreements").
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<PAGE> 88
Under the terms of the Management Agreement, the Trust is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or any Adviser, (c) the fees and certain expenses of the Custodian and Transfer
and Dividend Disbursing Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Trust and of pricing the Trust's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Trust, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Trust in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Trust
to governmental agencies, (g) the fees of any trade associations of which the
Trust may be a member, (h) the cost of share certificates representing shares of
the Trust, (i) the cost of fidelity and liability insurance, (j) certain
organization expenses of the Trust and the fees and expenses involved in
registering and maintaining registration of the Trust and of its shares with the
Commission and the states including the preparation and printing of the Trust's
registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Trustees meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders and (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Trust's business.
The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Trust 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 will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement was approved by the Trustees of the Trust,
including a majority of the Trustees who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act of
1940, as amended, (the "non-interested Trustees") on August , 1998 and by
PIFM, as sole shareholder of the Trust, on September , 1998.
As noted in the Prospectus, subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser manages the securities held
by a particular segment of the Portfolio in accordance with the Portfolio's
stated investment objectives and policies, makes investment decisions for that
Portfolio segment and places orders to purchase and sell securities on behalf of
that Portfolio segment. Generally, each Adviser does not accept retention as
investment adviser, investment manager or similar service provider during the
pendency of the particular Advisory Agreement, and for the period of one year
after the termination of the Advisory Agreement, with or for the benefit of any
investment company registered under the Investment Company Act that is managed
like the Trust. This limitation does not apply to the continuation of any
contractual relationship to which the Adviser is a party that is in effect on
the date of the relevant Advisory Agreement.
The Advisory Agreements were approved by the Trustees, including a majority
of the Trustees who are not parties to such contract or interested persons of
any such party as defined in the Investment Company Act, on August , 1998 and
were approved by the sole shareholder of the Trust on September , 1998 for all
of the Portfolios.
Each Advisory 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. Each Advisory Agreement may be terminated by the
Trust, PIFM or the Adviser upon not more than 60 days' written notice. Each
Advisory Agreement provides that it will continue in effect for a period of more
than two years from its execution only so long as such continuance is
specifically approved at least annually in accordance with the requirements of
the Investment Company Act.
The Manager and the Trust operate under an exemptive order from the
Commission which permits the Manager, subject to certain conditions, to enter
into or amend Advisory Agreements without obtaining shareholder approval each
time. On September , 1998 the sole shareholder of the Trust voted
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<PAGE> 89
affirmatively to give the Trust this ongoing authority. With Board approval, the
Manager is permitted to replace Advisers or employ additional Advisers for the
Portfolios, change the terms of the Portfolios' Advisory Agreements or enter
into a new Advisory Agreement with an existing Adviser after events that cause
an automatic termination of the old Advisory Agreement with that Adviser.
Shareholders of a Portfolio continue to have the right to terminate an Advisory
Agreement for the Portfolio at any time by a vote of the majority of the
outstanding voting securities of the Portfolio. Shareholders will be notified of
any Adviser changes or other material amendments to Advisory Agreements that
occur under these arrangements.
ADVISERS
The Manager pays the Advisers for their services the fees set forth below
with respect to each Portfolio (expressed as a percentage of average daily net
assets).
<TABLE>
<CAPTION>
ANNUAL FEE PAID
BY THE MANAGER
TO THE ADVISERS
TOTAL MANAGEMENT FEE (AS % OF
(AS % OF AVERAGE AVERAGE DAILY
PORTFOLIO DAILY NET ASSETS) NET ASSETS)
--------- -------------------- ---------------
<S> <C> <C>
Conservative Growth Portfolio............................... .75% %
Moderate Growth Portfolio................................... .75% %
Aggressive Growth Portfolio................................. .75% %
</TABLE>
The Advisers perform all administrative functions associated with serving
as Adviser to a Portfolio. Subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser is responsible for managing
the securities held by a particular Portfolio segment in accordance with the
Portfolio's stated investment objective and policies, making investment
decisions for that Portfolio segment, placing orders to purchase and sell
securities on behalf of that Portfolio segment, and performing various
administrative duties.
The following sets forth certain information about each of the Advisers:
[ADD MORE ABOUT ADVISERS]
DISTRIBUTOR
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 Trust.
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 Trust under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the "Distribution Agreement"), the Distributor incurs the expenses of
distributing each Portfolio's Class A, Class B and Class C shares, respectively.
The Distributor also incurs the expenses of distributing the Portfolios' Class Z
shares under the Distribution Agreement with the Trust, none of which are
reimbursed by or paid for by the Trust. See "How the Trust is
Managed -- Distributor" in the Prospectus.
The Class A Plan provides that (i) .25 of 1% of the average daily net
assets of the Class A shares of each Portfolio may be used to pay for personal
service and the maintenance of shareholder accounts ("service fee") and (ii)
total distribution fees (including the service fee of .25 of 1%) may not exceed
.30 of 1% for Class A shares of the Portfolio. The Class B and Class C Plans
provide that (i) .25 of 1% of the average daily net assets of each of the Class
B and Class C shares of each Portfolio may be paid as a service fee and (ii) .75
of 1% (not including the service fee) may be paid for distribution-related
expenses with respect to each of the Class B and Class C shares of each
Portfolio ("asset-based sales charge").
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<PAGE> 90
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B and Class C
shares. See "Shareholder Guide -- How to Sell Your Shares -- Contingent Deferred
Sales Charges" in the Prospectus.
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 Trustees, including a majority of the Trustees who are not
interested persons of the Trust 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 (the "Rule 12b-1 Trustees"), at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated with respect to a Portfolio
at any time, without penalty, by the vote of a majority of the Rule 12b-1
Trustees or by the vote of the holders of a majority of the outstanding shares
of the applicable class of the Portfolio 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 Trustees
in the manner described above. Each Plan will automatically terminate in the
event of its assignment. The Trust 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 Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Trust 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 Trustees shall be committed to the existing Rule 12b-1 Trustees.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws. The Distribution Agreement was
approved by the Board of Trustees, including a majority of the Rule 12b-1
Trustees, on August , 1998.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares of each Portfolio.
In the case of Class B shares, interest charges equal to the prime rate plus one
percent per annum may be added to the 6.25% limitation. Sales from the
reinvestment of dividends and distributions are not required to be included in
the calculation of the 6.25% limitation. The annual asset-based sales charge
with respect to Class B and Class C shares of a Portfolio may not exceed .75 of
1%. The 6.25% limitation applies to each Portfolio rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Each Adviser is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Portfolios, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions, if any.
Broker-dealers may receive negotiated brokerage commissions on transactions
in portfolio securities, including options, futures, and options on futures
transactions 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, dealer or futures commission merchant
including, to the extent and in the manner permitted by applicable law,
Prudential Securities, one of the Advisers or an affiliate thereof (an
"affiliated broker").
The Portfolios do not normally incur any brokerage commission expenses on
portfolio transactions involving fixed income securities. These securities are
generally traded on a "net" basis, with dealers
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<PAGE> 91
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
an issuer, in which case no commissions or discounts are paid.
Equity securities traded in the over-the-counter market and 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. The Trust will not deal with an affiliated broker in any
transaction in which such affiliated broker acts as principal. Thus, for
example, a Portfolio will not deal with an affiliated broker/dealer acting as
market maker, and it will not execute a negotiated trade with an affiliated
broker/dealer if execution involves an affiliated broker/dealer acting as
principal with respect to any part of the Portfolio's order.
In placing orders for securities for the Portfolios of the Trust, each
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that an Adviser will seek to
execute each transaction at a price and commission, if any, which provide the
most favorable total cost or proceeds reasonably attainable under the
circumstances. While an Adviser generally seeks reasonably competitive spreads
or commissions, the Trust will not necessarily be paying the lowest spread or
commission available. Within the framework of this policy, an Adviser may
consider research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Trust, an Adviser or an Adviser's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by an
Adviser in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for an
Adviser may be used in managing other investment accounts. Conversely, brokers,
dealers or futures commission merchants furnishing such services may be selected
for the execution of transactions for such other accounts, whose aggregate
assets are far larger than the Trust's, and the services furnished by such
brokers, dealers or futures commission merchants may be used by an Adviser in
providing investment management for the Portfolios. Commission rates are
established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker or futures commission merchant in the light of generally
prevailing rates. Each Adviser's policy is to pay brokers, dealers and futures
commission merchants, other than to an affiliated broker, higher commissions for
particular transactions than might be charged if a different broker had been
selected, on occasions when, in an Adviser's opinion, this policy furthers the
objective of obtaining best price and execution. In addition, each Adviser is
authorized to pay higher commissions on brokerage transactions for the
Portfolios to brokers, dealers and futures commission merchants, other than to
an affiliated broker, in order to secure research and investment services
described above, subject to review by the Trustees from time to time as to the
extent and continuation of this practice. The allocation of orders among
brokers, dealers and futures commission merchants and the commission rates paid
are reviewed periodically by the Trustees. While such services are useful and
important in supplementing the Advisers' own research and facilities, the
Advisers believe that the value of such services is not determinable and does
not significantly reduce their expenses.
Subject to the above considerations, an affiliated broker may act as a
securities broker, dealer or futures commission merchant for the Trust. In order
for an affiliated broker to effect any portfolio transactions for the Trust, the
commissions, fees or other remuneration received by the affiliated broker must
be reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold during a comparable period of time.
This standard would allow an affiliated broker to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensu-
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<PAGE> 92
rate arm's-length transaction. Furthermore, the Trustees, including a majority
of the Trustees who are not "interested" persons, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to affiliated brokers are consistent with the foregoing
standard.
In accordance with Section 11(a) under the Securities Exchange Act of 1934,
an affiliated broker may not retain compensation for effecting transactions on a
national securities exchange for the Trust unless the Trust has expressly
authorized the retention of such compensation. Section 11(a) provides that an
affiliated broker must furnish to the Trust at least annually a statement
setting forth the total amount of all compensation retained by such affiliated
broker for transactions effected by the Trust during the applicable period.
Brokerage transactions with an affiliated broker are also subject to such
fiduciary standards as may be imposed by applicable law.
PURCHASE AND REDEMPTION OF SHARES
Shares of each Portfolio may be purchased at a price equal to the next
determined net asset value ("NAV") per share plus a sales charge which, at the
election of the investor, may be imposed either (i) at the time of purchase
(Class A shares and Class C shares) or (ii) on a deferred basis (Class B and
Class C shares). Class Z shares of each Portfolio are offered to a limited group
of investors at NAV without any sales charges. See "Shareholder Guide -- How to
Buy Shares of the Trust" in the Prospectus.
Each class of a Portfolio represents an equal interest in the same
investment portfolio and is identical in all respects, except that (i) each
class is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges and
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights with respect to any matter submitted to shareholders
that relates solely to its arrangement and has separate voting rights on any
matter submitted to shareholders in which the interests of one class differ from
the interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account -- Exchange Privilege."
ISSUANCE OF PORTFOLIO SHARES FOR SECURITIES
Transactions involving the issuance of a Portfolio's shares for securities
(rather than cash) will be limited to: (i) reorganizations, (ii) statutory
mergers, or (iii) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the Portfolio, (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 securities exchange or market, and (d) are approved by the
Manager.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Trust and the
Distributor, Class A shares of each Portfolio are sold with a maximum sales
charge of 5% and Class B*, Class C* and Class Z shares
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<PAGE> 93
are sold at NAV. Using the NAV of each Portfolio at October 1, 1998, the maximum
offering price of the Portfolios' shares is as follows:
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE AGGRESSIVE
GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------- ----------
<S> <C> <C> <C>
CLASS A
Net asset value and redemption price per Class A share... $10.00 $10.00 $10.00
Maximum sales charge (5% of offering price).............. .53 .53 .53
------ ------ ------
Maximum offering price................................... $10.53 $10.53 $10.53
====== ====== ======
CLASS B
Net asset value, redemption price and offering price per
Class B share*......................................... $10.00 $10.00 $10.00
====== ====== ======
CLASS C
Net asset value and redemption price per Class C
share*................................................. $10.00 $10.00 $10.00
Sales charge (1% of offering price)...................... .10 .10 .10
------ ------ ------
Offering price........................................... $10.10 $10.10 $10.10
====== ====== ======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share.......................................... $10.00 $10.00 $10.00
====== ====== ======
</TABLE>
- ---------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide -- How to Sell Your
Shares -- Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of a Portfolio
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide -- Alternative Purchase Plan" in the Prospectus.
An eligible group of related Portfolio investors includes any combination
of the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account
("IRA");
(d) any company controlled by the individual (a person, entity or
group that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will be
deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Portfolio investors may include
an employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an
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<PAGE> 94
employer controlling, controlled by or under common control with another
employer is deemed related to that employer).
The Transfer Agent, the Distributor or your Dealer must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of a
Portfolio and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) to determine
the reduced sales charge. The value of shares held directly with the Transfer
Agent and through your Dealer will not be aggregated to determine the reduced
sales charge. The value of existing holdings for purposes of determining the
reduced sales charge is calculated using the maximum offering price (NAV plus
maximum sales charge) as of the previous business day. See "Net Asset Value" in
the Prospectus of the Trust. The Distributor or the Transfer Agent must be
notified at the time of purchase that the investor is entitled to a reduced
sales charge. The reduced sales charges will be granted subject to confirmation
of the investor's holdings. Rights of Accumulation are not available to
individual participants in any retirement or group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of a Portfolio and shares of other Prudential
Mutual Funds ("Investment Letter of Intent"). Retirement and group plans may
also qualify to purchase Class A shares at NAV by entering into a Letter of
Intent whereby they agree to enroll, within a thirteen-month period, a specified
number of eligible employees or participants ("Participant Letter of Intent").
For purposes of the Investment Letter of Intent, all shares of the
Portfolios and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) which were
previously purchased and are still owned are also included in determining the
applicable reduction. However, the value of shares held directly with the
Transfer Agent and through your Dealer will not be aggregated to determine the
reduced sales charge.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans),
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Trust to sell, the indicated amount. Similarly, the Participant Letter
of Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. If the goal
is exceeded in an amount which qualifies for a
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<PAGE> 95
lower sales charge, a price adjustment is made by refunding to the purchaser the
amount of excess sales charge, if any, paid during the thirteen-month period.
Investors electing to purchase Class A shares of the Portfolios pursuant to a
Letter of Intent should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
The contingent deferred sales charge ("CDSC") is waived under circumstances
described in the Prospectus. See "Shareholder Guide -- How to Sell Your
Shares -- Waiver of Contingent Deferred Sales Charges" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
------------------ -----------------------------------------------
<S> <C>
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability -- An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and indefinite must also indicate the date of disability.
duration.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the
Account custodial 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.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Trust 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 Trust makes available to its
shareholders the following privileges and plans.
B-32
<PAGE> 96
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 relevant
Portfolio. An investor may direct the Transfer Agent in writing not less than
five full business days prior to the record date to have subsequent dividends or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at NAV by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Such shareholder will receive
credit for any CDSC paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Trust makes available to its shareholders the exchange privilege. This
privilege allows shareholders to exchange their shares of each Portfolio for
shares of certain other Prudential Mutual Funds, including one or more specified
money market funds, subject in each case to the minimum investment requirements
of such funds. Shares of such other Prudential Mutual Funds may also be
exchanged for shares of the Portfolios. All exchanges are made on the basis of
the relative NAV next determined after receipt of an order in proper form. An
exchange will be treated as a redemption and purchase for tax purposes. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
exchange privilege is available for those funds eligible for investment in the
particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of a Portfolio 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 Trust may exchange their Class B
and Class C shares of a Portfolio for Class B and Class C shares, respectively,
of certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the date of the initial purchase, rather than the date of the
exchange.
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<PAGE> 97
Class B and Class C shares of a Portfolio may also be exchanged for Class B
and Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into the Portfolio, such shares will
be subject to the CDSC calculated without regard to the time such shares were
held in the money market fund. In order to minimize the period of time in which
shares are subject to a CDSC, shares exchanged out of the money market fund will
be exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time period
shares are held in a money market fund and "tolled" for purposes of calculating
the CDSC holding period, exchanges are deemed to have been made on the last day
of the month. Thus, if shares are exchanged into a Portfolio from a money market
fund during the month (and are held in the Portfolio 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, respectively, of a Portfolio 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, respectively, of other funds without
being subject to any CDSC.
CLASS Z. Class Z shares of a Portfolio may be exchanged for Class Z shares
of other Prudential Mutual Funds.
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or your Dealer. The exchange privilege may be modified, terminated
or suspended on 60 days' notice, and any fund, including the Trust, 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
B-34
<PAGE> 98
freshman class of 2011, the cost of four years at a private college could reach
$210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................................ $ 110 $ 165 $ 220 $ 275
20 Years............................................ 176 264 352 440
15 Years............................................ 296 444 592 740
10 Years............................................ 555 833 1,110 1,388
5 Years........................................... 1,371 2,057 2,742 3,428
</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 the
Portfolios. The investment return and principal value of an investment will
fluctuate so that an investor's shares when redeemed may be worth more or
less than their original cost. See "Automatic Savings Accumulation Plan."
AUTOMATIC SAVINGS ACCUMULATION PLAN ("ASAP")
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Portfolios 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 Portfolios.
The investor's bank must be a member of the Automatic Clearing House System.
Stock certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your Dealer.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your Dealer. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide -- How to Sell
Your Shares -- Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Shareholder Investment Account -- Automatic
Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
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<PAGE> 99
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 of
the same Portfolio are inadvisable because of the sales charges applicable to
(i) the purchase of Class A shares and (ii) the withdrawal of Class B and Class
C shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the plan, particularly if used in connection with a
retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7)of the Internal Revenue Code of 1986, as amended (the Internal Revenue
Code) are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, and the administration,
custodial fees and other details are available from Prudential Securities or the
Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account ("IRA")
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------- -------- -------
<S> <C> <C>
10 years.. $26,165 $31,291
15 years.. 44,675 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 Portfolios 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 Portfolios may be included in a mutual fund program
with other Prudential Mutual Funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these programs
are created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Trust may waive or reduce
the minimum initial investment requirements in connection with such a program.
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<PAGE> 100
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
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of each Portfolio. In
accordance with procedures adopted by the Trustees, the value of securities for
which the primary market is on an exchange shall be valued at the last sales
prices on that exchange on the day of valuation or, if there was no sale on such
day, the average of readily available closing bid and asked prices on such day.
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 Adviser under procedures established by and
under the general supervision of the Trustees. The value of a U.S. Government
security for which quotations are available shall be valued at a price provided
by an independent broker/dealer or pricing service. Pricing services consider
such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations.
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 appropriate Adviser to be over-the-counter are
valued at the average of the most recently quoted bid and asked prices provided
by a principal market maker. Securities issued in private placements are valued
at the mean between the bid and asked prices provided by primary market dealers.
Private placement securities for which no bid and asked prices are available and
other securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Adviser under procedures adopted by the Board of Trustees. 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 Trustees not to represent fair value. Short-term
securities with remaining maturities of 60 days or more, for which market
quotations are readily available, are valued at their current market quotations
as provided by an independent broker/dealer or pricing service. Options on
securities that are listed on an exchange and futures contracts and options
thereon traded on a commodities exchange or board of trade shall be valued at
the last sale price at the close of trading of the applicable exchange or board
of trade or, if there was no sale on the applicable exchange or board of trade,
at the average of quoted bid and asked prices as of the close of such exchange
or board of trade. Over-the-counter options are valued at the mean between bid
and asked prices provided by a dealer. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents at the current rate
obtained by a recognized bank or dealer. Forward currency exchange contracts are
valued at the current cost of covering or offsetting such contracts.
NAV is calculated separately for each class. The NAV of Class B and Class C
shares of a Portfolio will generally be lower than the NAV of Class A shares of
the same Portfolio 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 of a Portfolio
will generally be higher than the NAV of Class A, Class B or Class C shares of
the same Portfolio because Class Z shares are not subject to any distribution or
service fee. It is expected, however, that the NAV per share of each class will
tend to converge immediately after the recording of dividends, if any, which
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
Each Portfolio 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
B-37
<PAGE> 101
Portfolio shares have been received or days on which changes in the value of the
Portfolio's securities holdings 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 Trust'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.
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL
Each Portfolio has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves each Portfolio (but not its shareholders) from paying federal
income tax on income and gains which are distributed to shareholders, and
permits net capital gains of a Portfolio (i.e., the excess of net long-term
capital gains over net short-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long shares in the
Portfolio are held.
Qualification as a regulated investment company requires, among other
things, that (a) each Portfolio derive at least 90% of its 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 foreign
currencies, or other income, including, but not limited to, gains from options,
futures on such securities or foreign currencies; (b) each Portfolio diversify
its holdings so that, at the end of each fiscal quarter, (i) 50% of the value of
the Portfolio'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 Portfolio'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) each Portfolio distribute to its shareholders at least 90%
of its net investment income and net short-term gains (i.e., the excess of net
short-term capital gains over net long-term capital losses) in each year.
Distributions of net investment income and net short-term capital gains
will be taxable to the shareholder at ordinary income rates regardless of
whether the shareholder receives such distributions in additional shares or in
cash. To the extent a Portfolio's income is derived from certain dividends
received from domestic corporations, a portion of the dividends paid to
corporate shareholders of the Portfolio will be eligible for the 70% dividends
received deduction. Distributions of net capital gains, if any, are taxable as
long-term capital gains regardless of how long the investor has held his or her
shares. However, if a shareholder holds shares in a Portfolio for not more than
six months, then any loss recognized on the sale of such shares will be treated
as long-term capital loss to the extent any distribution on the shares was
treated as long-term capital gain. Shareholders will be notified annually by the
Trust as to the federal tax status of distributions made by a Portfolio of the
Trust. A 4% nondeductible excise tax will be imposed on a Portfolio of the Trust
to the extent a Portfolio does not meet certain distribution requirements by the
end of each calendar year. Distributions may be subject to additional state and
local taxes. Any distributions of net investment income or short-term capital
gains made to a foreign shareholder will generally be subject to U.S.
withholding tax of 30% (or a lower treaty rate if applicable to such
shareholder). See "Taxes, Dividends and Distributions" in the Prospectus.
ORIGINAL ISSUE DISCOUNT
A Portfolio may purchase debt securities that contain original issue
discount. Original issue discount that accrues in a taxable year is treated as
income earned by the Portfolio and therefore is subject to the distribution
requirements of the Internal Revenue Code. Because the original issue discount
income earned by the Portfolio in a taxable year may not be represented by cash
income, the Portfolio may have to dispose of other securities and use the
proceeds to make distributions to satisfy the Internal Revenue Code's
distribution requirements.
B-38
<PAGE> 102
OPTIONS AND FUTURES TRANSACTIONS
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts ("Section 1256 contracts").
At the end of each year, such investments held by a Portfolio will be required
to be "marked-to-market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss.
CURRENCY FLUCTUATIONS
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Portfolio accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Portfolio actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
disposition of debt securities denominated in a foreign currency attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security and the date of disposition also are treated as ordinary gain or
loss. These gains or losses, referred to under the Internal Revenue Code as
"Section 988" gains or losses, increase or decrease the amount of the
Portfolio's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Portfolio's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, distributions made by
the Portfolio during the year would be characterized as a return of capital to
shareholders, reducing each shareholder's basis in their shares.
FOREIGN WITHHOLDING
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties may reduce or eliminate such taxes. It is impossible to determine in
advance the effective rate of foreign tax to which the Portfolio will be
subject, since the amount of the Portfolio's assets to be invested in various
countries is not known. It is not anticipated that any Portfolio will qualify to
pass-through to the shareholders the ability to claim as a foreign tax credit
the foreign taxes paid by a Portfolio.
BACKUP WITHHOLDING
With limited exceptions, each Portfolio is required to withhold federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Trust with their correct taxpayer
identification number or to make required certification or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Any amounts withheld may be credited against a shareholder's
federal income tax liability.
PASSIVE FOREIGN INVESTMENT COMPANIES
A Portfolio may, from time to time, invest in Passive Foreign Investment
Companies ("PFICs"). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, a Portfolio's investments
in PFICs are subject to special tax provisions that may result in the taxation
of certain gains realized and unrealized by the Portfolio.
OTHER TAXATION
Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation. The foregoing summarizes
certain additional tax considerations generally affecting the Portfolios and
their shareholders that are not described in the Prospectus. No attempt is made
to present a detailed explanation of the tax treatment of the Portfolios or
their shareholders, and the discussions here and in the Prospectus are not
intended as a substitute for careful tax planning.
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<PAGE> 103
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Trust.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN
The Trust may from time to time advertise the average annual total return
of a Portfolio. Average annual total return is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1+T)(n) = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
</TABLE>
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).
AGGREGATE TOTAL RETURN
The Trust may from time to time advertise the aggregate total return of a
Portfolio. A Portfolio's aggregate total return figures represent the cumulative
change in the value of an investment in the Portfolio for the specified period
and are computed by the following formula:
ERV-P
-----------
P
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000.
</TABLE>
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.
Comparative performance information may be used from time to time in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Trust's portfolio securities
and cash, and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Trust.
Prudential Mutual Fund Services LLC ("PMFS"), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Trust. It is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Trust, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions. For these services, PMFS receives an annual fee per shareholder
account of $35.00. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communications and other costs. In addition, the Trust may pay fees for
recordkeeping services in respect of certain eligible defined benefit plan
investors.
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<PAGE> 104
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036 currently serves as the Trust's independent accountants and, in that
capacity, audits the Trust's annual financial statements.
[ADVISER PERFORMANCE DATA]
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<PAGE> 105
APPENDIX I
DESCRIPTION OF SECURITY RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA -- Debt rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B -- Debt rated BB and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB represents a lower degree of
speculation than B. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of Investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding Investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
I-1
<PAGE> 106
B -- Bonds which are rated B generally lack characteristics of the
desirable Investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for Issues designated A-1.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or supporting institutions) are considered to
have a superior capacity for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) are considered to have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics of issuers rated Prime-1
but to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
I-2
<PAGE> 107
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 illustrates that large pension plans use the methods listed in
the percentages indicated for the period December 1977 through December 1987.
HOW YOU ALLOCATE YOUR ASSETS
MAINLY DETERMINES YOUR RETURN
(BASED ON A STUDY OF LARGE PENSION PLANS)
<TABLE>
<CAPTION>
[PIE CHART]
<S> <C>
SECURITY SELECTION/OTHER........................ 6.7%
ASSET ALLOCATION................................ 91.5%
MARKET TIMING................................... 1.8%
</TABLE>
Source: Financial Analysts Journal, May/June 1991: "Deteminants of
Portfolio Performance II: An Update," by Gary Brinson, Brian Singer and Gilbert
Beebower. Results are based on the 10-year performance records of 82 pension
funds. The study updates and supports a similar study done in 1986. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any Portfolio.
II-1
<PAGE> 108
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25 THROUGH 12/31/97)
[DOLLAR GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C>
Inflation $9
T-Bills $14
Bonds $39
Common Stock $1,828
Small Stock $5,520
</TABLE>
Source: "Stocks, Bonds, Bills, and Inflation 1998 Yearbook,(TM) " Ibbotson
Associates, annually updates work by Roger Ibbotson and Rex Sinquefeld. Used
with permission. This chart is for illustrative purposes only and is not
indicative of the past, present, or future performance of any Portfolio.
Generally, stock returns are due to capital appreciation and reinvesting
any gains. Bond returns are due mainly 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. For 1981 through 1997, returns are
those of the Dimensional Fund Advisors ("DFA") Small Company Fund, which is a
market-value-weighted index of the ninth and tenth deciles of the New York Stock
Exchange ("NYSE"), plus stocks listed on the American Stock Exchange and
over-the-counter with the same or less capitalization as the upper bound of the
NYSE decile.
COMMON STOCK returns are based on the S&P 500 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-2
<PAGE> 109
The following chart shows the performance of a hypothetical investment in
the following stock indices for the period indicated.
DIFFERENT TYPES OF STOCKS, DIFFERENT RETURNS
VALUE OF $1 INVESTED ON 12/31/69
[BAR CHART]
<TABLE>
<CAPTION>
$50 $40 $30 $20 $10 $0
<S> <C> <C> <C> <C> <C> <C>
Common Stocks 30.44
Small Stocks 43.73
Foreign Stock 28.37
</TABLE>
COMMON STOCK returns are based on the S&P 500 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.
SMALL STOCK performance for the beginning of the period through 1980 is
based on the returns of stocks making up the 5th quintile of the New York Stock
Exchange ("NYSE") and, for 1981-1997, is based on the returns of the DFA Small
Company Fund, which is a market-value-weighted index of the ninth and tenth
deciles of the NYSE, plus stocks listed on the American Stock Exchange and
over-the-counter with the same or less capitalization as the upper bound of the
NYSE decile.
FOREIGN STOCK returns are represented by the Morgan Stanley Capital
International Europe Australia Far East ("EAFE") index, a common measure of
foreign stock performance. It is a market-weighted index of 20 countries.
Geometric Returns are through 1997. Generally, returns of foreign stocks
are more volatile than those of common or small stocks.
This chart is for illustrative purposes only and is not indicative of the
past, present, or future performance of any Portfolio.
Source: Lipper Analytical Services.
II-3
<PAGE> 110
This chart shows the performance of a hypothetical investment in short-term
U.S. Government securities adjusted for inflation for the period from January 1,
1997 through December 31, 1997.
TOO MANY SHORT-TERM SECURITIES
MAY NOT MAKE SENSE
INFLATION AND TAXES CAN ERODE YOUR INVESTMENT
<TABLE>
<S> <C>
Initial investment.......................................... $ 10,000
Interest income: 5.26%...................................... 526
Tax paid on interest (assumes 31% tax rate)................. -163
-------------
Net interest income......................................... 363
Adjust for 1.7% inflation................................... -170
Net investment.............................................. $ 10,193
-------------
</TABLE>
THE INVESTOR'S NET RETURN WAS ONLY 1.93%!
1997 Salomon Brothers 30-day T-bill return used for short-term interest
rate. Federal tax rate of 31% and 1997 inflation rate ("CPI") were used.
Short-term rates can fluctuate.
Past performance is no guarantee of future results. This hypothetical
example is provided for informational purposes only. It is not intended to
represent any specific investment and is not indicative of past, present, or
future performance of any Portfolio.
II-4
<PAGE> 111
]
Each bar shows the best
and worst annualized return for
the specified holding periods
through 1997. For example, the
best one-year return occurred
in 1933 and the worst 10-year
annualized return occurred from
1929-1938. The first holding
period started on 12/31/25 and
the first 20-year period ended
on 12/31/45.
Common stock returns are
based on the S&P 500 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.
This chart is for
illustrative purposes only and
is not indicative of the past,
present, or future performance
of any Portfolio.
Source: "Stocks, Bonds,
Bills, and Inflation 1998
Yearbook,(TM)" Ibbotson
Associates, annually updates
work by Roger Ibbotson and Rex
Sinquefeld. Used with permission.
TIME REDUCES YOUR RISK
BEST AND WORST ANNUALIZED RETURNS OF THE S&P
[BAR CHART]
II-5
<PAGE> 112
This graph represents the historical risk and return possibilities of
hypothetical blends of investments in the described indices for the period
indicated.
FOREIGN STOCKS CAN ADD VALUE
[RISK/RETURN CHART]
Adding foreign stocks to a portfolio of U.S. stocks can increase the
portfolio's return and, to an extent, reduce the volatility of its annualized
returns. For example, note the higher return and lower risk of the 80/20 blend
compared to the 100% U.S. stock portfolio. There is no guarantee that this
relationship will hold in the future, however.
This chart was constructed using the Morgan Stanley Capital International
Europe Australia Far East ("EAFE") Index, a market-weighted index of 20
countries that is a common measure of foreign stock performance, and the
arithmetic returns of the S&P 500 Composite Index, a market-weighted, unmanaged
index of 500 stocks (currently) in a variety of industries. The S&P Composite
500 is often used as a broad measure of stock market performance. The chart
covers the 25-year period ended 12/31/97. The chart is not meant to demonstrate
the future performance of either type of stock and is for illustrative purposes
only. Also, it is not indicative of the past, present, or future performance of
any Portfolio.
II-6
<PAGE> 113
APPENDIX III -- 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.
III-1
<PAGE> 114
APPENDIX IV--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Trust.
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 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of 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 ($12.3 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. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in assets
under management. Prudential Investments, a business group of Prudential (of
which Prudential Mutual Funds is a key part), manages over $211 billion in
assets of institutions and individuals. In Pension & Investments, May 12, 1997,
Prudential was ranked third in terms of total assets under management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 37,000 brokers
and agents and more than 1,100 offices throughout the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has over $1 billion in assets and serves nearly
1.5 million customers across 50 states.
- ---------------
(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as the subadviser
to Prudential Jennison Series Fund, Inc. and Mercator Asset Management, LP
as the subadviser to The International Stock Series, a portfolio of
Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.
(2) As of December 31, 1996.
IV-1
<PAGE> 115
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997 Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the subadvisers
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Series Fund, Inc., a
growth-style equity fund managed by Jennison Associates LLC, a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- ---------------
(3) As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
IV-2
<PAGE> 116
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, approximately 29,000 new
customer accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner ("CFP") program.
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Three
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect(SM), a state-of-the-art asset allocation software program
which helps financial advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------------
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Investments, a business group of PIC, for the year ended
December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.
(7) As of December 31, 1997.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
IV-3
<PAGE> 117
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) Financial Statements:
(1) Financial statements included in the Prospectus constituting Part A of
this Registration Statement:
None.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
(a) Statement of Assets and Liabilities**
(b) Report of Independent Auditors.**
- ---------------
* To be filed by future pre-effective amendment.
(B) Exhibits:
<TABLE>
<C> <C> <S> <C>
1. (a) Certificate of Trust.*
(b) Agreement and Declaration of Trust.*
2. By-Laws.*
3. Not Applicable.
4. In response to this item, Registrant incorporates by
reference the following provisions from its Agreement and
Declaration of Trust and By-Laws, filed herewith as Exhibit
1(b) and Exhibit 2, defining rights of the Trust's
shareholders: Articles III and V of Agreement and
Declaration of Trust; Article III of By-Laws.
5. (a) Form of Management Agreement between the Registrant and
Prudential Investments Fund Management LLC.*
(b) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Subadviser.*
6. Form of Distribution Agreement between the Registrant and
Prudential Investment Management Services LLC.*
7. Not Applicable.
8. Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company.*
9. Form of Transfer Agency and Service Agreement between the
Registrant and Prudential Mutual Fund Services, Inc.*
10. Opinion of Morris, Nichols, Arsht & Tunnell dated August 3,
1998.*
11. Consent of Independent Accountants.**
12. Not Applicable.
13. Purchase Agreement.**
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A shares.*
(b) Distribution and Service Plan for Class B shares.*
(c) Distribution and Service Plan for Class C shares.*
16. Schedule of Computation of Performance Quotations.**
18. Rule 18f-3 Plan.*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by future pre-effective amendment.
C-1
<PAGE> 118
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of August 4, 1998 the Trust had no shareholders.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended, (the "Investment Company Act") and pursuant to Article VII of
the Agreement and Declaration of Trust (Exhibit 1(b) to the Registration
Statement) and Article XI of the Trust's By-Laws (Exhibit 2 to the Registration
Statement), officers, trustees, employees and agents of the Registrant will not
be liable to the Registrant, any stockholder, officer, director, employee, agent
or other person for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties, and those
individuals may be indemnified against liabilities in connection with the
Registrant, subject to the same exceptions. Section 3817 of the Delaware
Business Trust Act permits indemnification of trustees who acted in good faith
and reasonably believed that the conduct was in the best interest of the
Registrant. As permitted by Section 17(i) of the Investment Company Act,
pursuant to Section 10 of the Distribution Agreement (Exhibit 6 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 trustees, 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 Investment Company 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 trustee, 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 trustee, 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 Investment Company Act and will be governed by the
final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees 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 trustees under certain circumstances.
Section 8 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreements (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC ("PIFM") and each Adviser, 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
Investment Company Act as long as the interpretation of Section 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
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<PAGE> 119
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(A) Prudential Investments Fund Management LLC
See "Management of the Trust -- Manager" in the Prospectus constituting
Part A of this Registration Statement and "Manager" in the Statement of
Additional Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, as most recently amended (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, New
Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<S> <C> <C>
Brian Storms................. Officer-in Charge, President, Prudential Mutual Funds &
President, Chief Annuities (PMF&A); Officer-in Charge,
Executive Officer and President, Chief Executive Officer and
Chief Operating Chief Operating Officer, PIFM
Officer
Frank W. Giordano............ Executive Vice Senior Vice President, Prudential
President, Secretary Securities, Incorporated; Executive Vice
and General Counsel President, Secretary and General
Counsel, PIFM
Robert F. Gunia.............. Executive Vice President Vice President, Prudential Investments;
and Treasurer Executive Vice President and Treasurer,
PIFM; Senior Vice President, Prudential
Securities
Neil A. McGuinness........... Executive Vice President Executive Vice President, and Director of
Marketing, PMF&A; Executive Vice
President; PIFM
Robert J. Sullivan........... Executive Vice President Executive Vice President, PMF&A; Executive
Vice President; PIFM
</TABLE>
Information for this item relating to the Trust's Advisers will be added in
a Pre-Effective Amendment to this Registration Statement.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC
Prudential Investment Management Services LLC is distributor for the Cash
Accumulation Trust, Command Government Fund, Command Money Fund, Command
Tax-Free Fund, The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Diversified Bond Fund, Inc., Prudential Distressed Securities Fund, Inc.,
Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential
Equity Income Fund, Inc., 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 Index Series Fund, Prudential Institutional
Liquidity Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc.,
Prudential International Bond Fund, Inc., Prudential Jennison Series Fund, Inc.,
Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc.,
Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund, Inc.,
Prudential Special Money
C-3
<PAGE> 120
Market Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential
Tax-Free Fund, Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc.,
and The Target Portfolio Trust.
(b) Information concerning the directors and officers of Prudential
Investment Management Services LLC is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
NAME OFFICES WITH UNDERWRITER OFFICES WITH REGISTRANT
---- ------------------------ -----------------------
<S> <C> <C>
E. Michael Caulfield..................... President None
Mark R. Fetting.......................... Executive Vice President None
Jonathan M. Greene....................... Executive Vice President None
Jean D. Hamilton......................... Executive Vice President None
Ronald P. Joelson........................ Executive Vice President None
Brian M. Storms.......................... Executive Vice President None
John R. Strangfeld....................... Executive Vice President None
Mario A. Mosse........................... Senior Vice President and None
Chief Operating Officer
Scott S. Wallner......................... Vice President, Secretary and None
Chief Legal Officer
Michael G. Williamson.................... Vice President, Comptroller None
and Chief Financial Officer
C. Edward Chaplin........................ Treasurer None
</TABLE>
- ---------------
(1) The address of each person named is Three Gateway Center, Newark, NJ 07102
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company 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 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)(4), (5), (6), (7), (9), (10) and (11), 31a-1(d), and 31a-1(f)
will be kept at 100 Mulberry Street, Gateway Center Three, Newark, New Jersey
07102-4077 and the remaining accounts, books and other documents required by
such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "Management of the
Trust -- Manager" and "Management of the Trust -- Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant hereby undertakes to furnish to each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-4
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark and State of New Jersey, on the 4th day of
August, 1998.
PRUDENTIAL DIVERSIFIED SERIES
/s/ DAVID F. CONNOR
--------------------------------------
(David F. Connor, President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID F. CONNOR President and Trustee August 4, 1998
- ---------------------------------------------------
David F. Connor
/s/ ROBERT C. ROSSELOT Treasurer, and Principal August 4, 1998
- --------------------------------------------------- Financial and Accounting Officer
Robert C. Rosselot
/s/ S. JANE ROSE Trustee and Secretary August 4, 1998
- ---------------------------------------------------
S. Jane Rose
</TABLE>
C-5
<PAGE> 122
EXHIBIT INDEX
<TABLE>
<C> <S> <C> <C>
1. (a) Certificate of Trust.*
(b) Agreement and Declaration of Trust.*
2. By-Laws.*
5. (a) Form of Management Agreement between the Registrant and
Prudential Investments Fund Management LLC.*
(b) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Subadviser.*
6. Form of Distribution Agreement between the Registrant and
Prudential Investment Management Services LLC.*
8. Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company.*
9. Form of Transfer Agency and Service Agreement between the
Registrant and Prudential Mutual Fund Services, Inc.*
10. Opinion of Morris, Nichols, Arsht & Tunnell dated August 4,
1998.*
15. (a) Distribution and Service Plan for Class A shares.*
(b) Distribution and Service Plan for Class B shares.*
(c) Distribution and Service Plan for Class C shares.*
18. Rule 18f-3 Plan.*
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1(a)
CERTIFICATE OF TRUST
This Certificate of Trust of Prudential Diversified Series (the
"Trust"), dated July 29, 1998, is being duly executed and filed to form a
business trust under the Delaware Business Trust Act (12 Del. C. Sections 3801
et seq.).
1. Name. The name of the business trust formed hereby is Prudential
Diversified Series.
2. Registered Agent. The business address of the registered office of
the Trust in the State of Delaware is Corporation Trust Center, 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801. The name of the Trust's
registered agent at such address is The Corporation Trust Company.
3. Effective Date. This Certificate of Trust shall be effective upon
the date and time of filing.
4. Series Trust. Notice is hereby given that pursuant to Section 3804
of the Delaware Business Trust Act, the debts, liabilities, obligations and
expenses incurred, contracted for or otherwise existing with respect to a
particular series of the Trust shall be enforceable against the assets of such
series only and not against the assets of any other series or of the Trust
generally. The Trust is, or will become prior to or within 180 days following
the first issuance of beneficial interests therein, a registered investment
company under the Investment Company Act of 1940, as amended.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the
Trust, have executed this Certificate of Trust as of the date first above
written.
/s/ David F. Connor
-------------------------------
Name: David F. Connor
as Trustee and not individually
/s/ S. Jane Rose
-------------------------------
Name: S. Jane Rose
as Trustee and not individually
/s/ Robert C. Rosselot
-------------------------------
Name: Robert C. Rosselot
as Trustee and not individually
<PAGE> 1
EXHIBIT 1(b)
AGREEMENT AND DECLARATION OF TRUST
of
PRUDENTIAL DIVERSIFIED SERIES
a Delaware Business Trust
Principal Place of Business:
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
<PAGE> 2
TABLE OF CONTENTS
AGREEMENT AND DECLARATION OF TRUST
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Name and Definitions ............................................... 1
1. Name .................................................... 1
2. Definitions ............................................. 1
(a) By-Laws ............................................... 1
(b) Certificate of Trust .................................. 1
(c) Class ................................................. 2
(d) Commission and Principal Underwriter .................. 2
(e) Declaration of Trust .................................. 2
(f) Delaware Act .......................................... 2
(g) Interested Person ..................................... 2
(h) Investment Manager or Manager ......................... 2
(i) 1940 Act .............................................. 2
(j) Person ................................................ 2
(k) Series ................................................ 2
(1) Shareholder ........................................... 2
(m) Shares ................................................ 2
(n) Trust ................................................. 2
(o) Trust Property ........................................ 3
(p) Trustees .............................................. 3
ARTICLE II Purpose of Trust .................................................. 3
ARTICLE III Shares ........................................................... 3
1. Division of Beneficial Interest ..................................... 3
2. Ownership of Shares ................................................. 4
3. Transfer of Shares .................................................. 5
4. Investments in the Trust ............................................ 5
5. Status of Shares and Limitation of
Personal Liability ................................................. 5
6. Establishment and Designation of Series ............................. 6
(a) Assets Held with Respect to a
Particular Series ........................................... 6
(b) Liabilities Held with Respect to a
Particular Series ........................................... 7
(c) Dividends, Distributions, Redemptions,
and Repurchases ............................................. 7
(d) Equality ...................................................... 7
(e) Fractions ..................................................... 8
(f) Exchange Privilege ............................................ 8
(g) Combination of Series ......................................... 8
(h) Elimination of Series ......................................... 8
7. Indemnification of Shareholders ..................................... 8
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
ARTICLE IV The Board of Trustees............................................... 9
1. Number, Election and Tenure ......................................... 9
2. Effect of Death, Resignation, etc.
of a Trustee ....................................................... 9
3. Powers .............................................................. 10
4. Payment of Expenses by the Trust .................................... 14
5. Payment of Expenses by Shareholders ................................. 14
6. Ownership of Assets of the Trust .................................... 15
7. Service Contracts ................................................... 15
8. Trustees and Officers as Shareholders ............................... 17
ARTICLE V Shareholders' Voting Powers and Meetings ............................ 17
1. Voting Powers, Meetings, Notice and
Record Dates ....................................................... 17
2. Quorum and Required Vote ............................................ 18
3. Record Dates ........................................................ 19
4. Additional Provisions ............................................... 19
ARTICLE VI Net Asset Value, Distributions and Redemptions .................... 19
1. Determination of Net Asset Value,
Net Income and Distributions ....................................... 19
2. Redemptions and Repurchases ......................................... 19
ARTICLE VII Compensation and Limitation of Liability of Trustees ............. 21
1. Compensation ........................................................ 21
2. Indemnification and Limitation of
Liability .......................................................... 21
3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety .......................................... 22
4. Insurance ........................................................... 22
ARTICLE VIII Miscellaneous ................................................... 23
1. Liability of Third Persons Dealing
with Trustees ...................................................... 23
2. Termination of Trust or Series ...................................... 23
3. Reorganization and Master/Feeder..................................... 24
4. Amendments .......................................................... 25
5. Filing of Copies, References,
Headings ........................................................... 25
6. Applicable Law ...................................................... 26
7. Provisions in Conflict with Law or Regulations ...................... 27
8. Business Trust Only ................................................. 27
9. Derivative Actions .................................................. 27
</TABLE>
<PAGE> 4
AGREEMENT AND DECLARATION OF TRUST
OF
PRUDENTIAL DIVERSIFIED SERIES
THIS AGREEMENT AND DECLARATION OF TRUST is made and entered into as of
the date set forth below by the Trustees named hereunder for the purpose of
forming a Delaware business trust in accordance with the provisions hereinafter
set forth,
NOW, THEREFORE, the Trustees hereby direct that the Certificate of
Trust be filed with the Office of the Secretary of State of the State of
Delaware and do hereby declare that the Trustees will hold IN TRUST all cash,
securities and other assets which the Trust now possesses or may hereafter
acquire from time to time in any manner and manage and dispose of the same upon
the following terms and conditions for the benefit of the holders of Shares in
this Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as PRUDENTIAL DIVERSIFIED
SERIES and the Trustees shall conduct the business of the Trust under that name
or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required
by the context or specifically provided:
(a) "By-Laws" shall mean the By-Laws of the Trust as amended from time
to time, which By-Laws are expressly herein incorporated by reference as part of
the "governing instrument" within the meaning of the Delaware Act;
(b) "Certificate of Trust" means the certificate of trust, as amended
or restated from time to time, filed by the Trustees in the Office of the
Secretary of State of the State of Delaware in accordance with the Delaware Act;
<PAGE> 5
(c) "Class" means a class of Shares of a Series of the Trust
established in accordance with the provisions of Article III hereof;
(d) "Commission" and "Principal Underwriter" shall have the meanings
given them in the 1940 Act;
(e) "Declaration of Trust" means this Agreement and Declaration of
Trust, as amended or restated from time to time;
(f) "Delaware Act" means the Delaware Business Trust Act, 12 Del. C.
Section 3801 et seq., as amended from time to time;
(g) "Interested Person" shall have the meaning given it in Section 2(a)
(19) of the 1940 Act;
(h) "Investment Manager" or "Manager" means a party furnishing services
to the Trust pursuant to any contract described in Article IV, Section 7(a)
hereof;
(i) "1940 Act" means the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
(j) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof, whether domestic or foreign;
(k) "Series" means each Series of Shares established and designated
under or in accordance with the provisions of Article III;
(l) "Shareholder" means a record owner of outstanding Shares;
(m) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares;
(n) "Trust" means the Delaware Business Trust established under the
Delaware Act by this Declaration of Trust and the filing of the Certificate of
Trust in the Office of the Secretary of State of the State of Delaware;
-2-
<PAGE> 6
(o) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is from time to time owned or held by or for the
account of the Trust; and
(p) "Trustees" means the persons who have signed this Declaration of
Trust and all other Persons who may from time to time be duly elected or
appointed to serve as Trustees in accordance with the provisions hereof, in each
case so long as such Person shall continue in office in accordance with the
terms of this Declaration of Trust, and reference herein to a Trustee or the
Trustees shall refer to such Person or Persons in his or their capacity as
trustees hereunder.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the
business of a management investment company registered under the 1940 Act
through one or more Series investing primarily in securities, and to carry on
such other business as the Trustees may from time to time determine pursuant to
their authority under this Declaration of Trust.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in
the Trust shall be divided into one or more Series. Each Series may be divided
into two or more Classes. Subject to the further provisions of this Article III
and any applicable requirements of the 1940 Act, the Trustees shall have full
power and authority, in their sole discretion, and without obtaining any
authorization or vote of the Shareholders of any Series or Class thereof, (i) to
divide the beneficial interest in each Series or Class thereof into Shares, with
or without par value as the Trustees shall determine, (ii) to issue Shares
without limitation as to number (including fractional Shares), to such Persons
and for such amount and type of consideration, subject to any restriction set
forth in the By-Laws, including cash or securities, at such time or times and on
such terms as the Trustees may deem appropriate, (iii) to establish and
designate and to change in any manner any Series or Class thereof and to fix
such preferences, voting powers, rights, duties and privileges and business
purpose of each Series or Class thereof as the Trustees may from time to time
determine, which preferences, voting powers, rights, duties and privileges may
be senior or subordinate to
-3-
<PAGE> 7
(or in the case of business purpose, different from) any existing Series or
Class thereof and may be limited to specified property or obligations of the
Trust or profits and losses associated with specified property or obligations of
the Trust, (iv) to divide or combine the Shares of any Series or Class thereof
into a greater or lesser number without thereby materially changing the
proportionate beneficial interest of the Shares of such Series or Class in the
assets held with respect to that Series, (v) to classify or reclassify any
issued Shares of any Series or Class thereof into shares of one or more Series
or Classes thereof and (vi) to take such other action with respect to the Shares
as the Trustees may deem desirable.
Subject to the distinctions permitted among Classes of the same Series
as established by the Trustees consistent with the requirements of the 1940 Act,
each Share of a Series of the Trust shall represent an equal beneficial interest
in the net assets of such Series, and each holder of Shares of a Series shall be
entitled to receive such holder's pro rata share of distributions of income and
capital gains, if any, made with respect to such Series. Upon redemption of the
Shares of any Series, the applicable Shareholder shall be paid solely out of the
funds and property of such Series of the Trust.
All references to Shares in this Declaration of Trust shall be deemed
to be Shares of any or all Series or Classes thereof, as the context may
require. All provisions herein relating to the Trust shall apply equally to each
Series of the Trust and each Class thereof, except as the context otherwise
requires.
All Shares issued hereunder, including, without limitation, Shares
issued in connection with a dividend in Shares or a split or reverse split of
Shares, shall be fully paid and non-assessable. Except as otherwise provided by
the Trustees, Shareholders shall have no preemptive or other right to subscribe
to any additional Shares or other securities issued by the Trust.
Section 2. Ownership of Shares. The Ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent for the Trust,
which books shall be maintained separately for the Shares of each Series (or
Class). No certificates certifying the ownership of Shares shall be issued
except as the Board of Trustees may otherwise determine from time to time. The
Trustees may make such rules as they consider appropriate for the issuance of
Share certificates, the transfer of Shares of each Series (or Class) and similar
matters. The record books of the Trust as kept by the Trust or any transfer or
similar agent, as the case may be, shall be conclusive as to the identity of the
Shareholders of each Series (or
-4-
<PAGE> 8
Class) and as to the number of Shares of each Series (or Class) held from time
to time by each Shareholder.
Section 3. Transfer of Shares. Except as otherwise provided by the
Trustees, Shares shall be transferable on the books of the Trust only by the
record holder thereof or by his duly authorized agent upon delivery to the
Trustees or the Trust's transfer agent of a duly executed instrument of
transfer, together with a Share certificate if one is outstanding, and such
evidence of the genuineness of each such execution and authorization and of such
other matters as may be required by the Trustees. Upon such delivery, and
subject to any further requirements specified by the Trustees or contained in
the By-Laws, the transfer shall be recorded on the books of the Trust. Until a
transfer is so recorded, the Shareholder of record of Shares shall be deemed to
be the holder of such Shares for all purposes hereunder and neither the Trustees
nor the Trust, nor any transfer agent or registrar or any officer, employee or
agent of the Trust, shall be affected by any notice of a proposed transfer.
Section 4. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize.
Section 5. Status of Shares and Limitation of Personal Liability.
Shares shall be deemed to be personal property giving only the rights provided
in this instrument. Every Shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof. The
death, incapacity, dissolution, termination or bankruptcy of a Shareholder
during the existence of the Trust shall not operate to terminate the Trust, nor
entitle the representative of any such Shareholder to an accounting or to take
any action in court or elsewhere against the Trust or the Trustees, but entitles
such representative only to the rights of such Shareholder under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title in or to the
whole or any part of the Trust Property or right to call for a partition or
division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders as partners. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholders, nor, except as specifically provided herein, to
call upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
-5-
<PAGE> 9
Section 6. Establishment and Designation of Series. The establishment
and designation of any Series (or Class) of Shares shall be effective upon the
adoption by a majority of the then Trustees of a resolution that sets forth such
establishment and designation and the relative rights and preferences of such
Series (or Class), whether directly in such resolution or by reference to
another document including, without limitation, any registration statement of
the Trust, or as otherwise provided in such resolution.
Shares of each Series (or Class) established pursuant to this Article
III, unless otherwise provided in the resolution establishing such Series, shall
have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably be held with respect to that Series for all purposes, subject only
to the rights of creditors of such Series, and shall be so recorded upon the
books of account of the Trust. Such consideration, assets, income, earnings,
profits and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
held with respect to" that Series. In the event that there are any assets,
income, earnings, profits and proceeds thereof, funds or payments which are not
readily identifiable as assets held with respect to any particular Series
(collectively "General Assets"), the Trustees shall allocate such General Assets
to, between or among any one or more of the Series in such manner and on such
basis as the Trustees, in their sole discretion, deem fair and equitable, and
any General Assets so allocated to a particular Series shall be held with
respect to that Series. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Series for all purposes. Separate and
distinct records shall be maintained for each Series and the assets held with
-6-
<PAGE> 10
respect to each Series shall be held and accounted for separately from the
assets held with respect to all other Series and the General Assets of the Trust
not allocated to such Series.
(b) Liabilities Held with Respect to a Particular Series. The assets of
the Trust held with respect to each particular Series shall be charged against
the liabilities of the Trust held with respect to that Series and all expenses,
costs, charges and reserves attributable to that Series. Any general liabilities
of the Trust which are not readily identifiable as being held with respect to
any particular Series shall be allocated and charged by the Trustees to and
among any one or more of the Series in such manner and on such basis as the
Trustees in their sole discretion deem fair and equitable. All liabilities,
expenses, costs, charges, and reserves so charged to a Series are herein
referred to as "liabilities held with respect to" that Series. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series for all purposes. All
liabilities held with respect to a particular Series shall be enforceable
against the assets held with respect to such Series only and not against the
assets of the Trust generally or against the assets held with respect to any
other Series. Notice of this contractual limitation on the liability of each
Series shall be set forth in the Certificate of Trust or in an amendment thereto
prior to the issuance of any Shares of a Series.
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including,
without limitation, Article VI, no dividend or distribution, including, without
limitation, any distribution paid upon termination of the Trust or of any Series
(or Class) with respect to, nor any redemption or repurchase of, the Shares of
any Series (or Class) shall be effected by the Trust other than from the assets
held with respect to such Series, nor shall any Shareholder of any particular
Series otherwise have any right or claim against the assets held with respect to
any other Series except to the extent that such Shareholder has such a right or
claim hereunder as a Shareholder of such other Series. The Trustees shall have
full discretion, to the extent not inconsistent with the 1940 Act, to determine
which items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(d) Equality. All the Shares of each particular Series shall represent
an equal proportionate interest in the assets held with respect to that Series
(subject to the liabilities held with respect to that
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Series and such rights and preferences as may have been established and
designated with respect to Classes of Shares within such Series), and each Share
of any particular Series shall be equal to each other Share of that Series.
(e) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole Share of that Series,
including rights with respect to voting, receipt of dividends and distributions,
redemption of Shares and termination of the Trust.
(f) Exchange Privilege. The Trustees shall have the authority to
provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series of Shares in
accordance with such requirements and procedures as may be established by the
Trustees.
(g) Combination of Series. The Trustees shall have the authority,
without the approval of the Shareholders of any Series unless otherwise required
by applicable law, to combine the assets and liabilities held with respect to
any two or more Series into assets and liabilities held with respect to a single
Series.
(h) Elimination of Series. At any time that there are no Shares
outstanding of any particular Series (or Class) previously established and
designated, the Trustees may by resolution of a majority of the then Trustees
abolish that Series (or Class) and rescind the establishment and designation
thereof.
Section 7. Indemnification of Shareholders. If any Shareholder or
former Shareholder shall be exposed to liability by reason of a claim or demand
relating to such Person being or having been a Shareholder, and not because of
such Person's acts or omissions, the Shareholder or former Shareholder (or such
Person's heirs, executors, administrators, or other legal representatives or in
the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the Trust against all loss and expense arising from such claim or
demand, but only out of the assets held with respect to the particular Series of
Shares of which such Person is or was a Shareholder and from or in relation to
which such liability arose.
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ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees shall
initially be three, who shall be David F. Connor, S. Jane Rose and Robert C.
Rosselot. Hereafter, the number of Trustees shall at all times be at least one
and no more than fifteen as determined, from time to time, by the Trustees
pursuant to Section 3 of this Article IV. Each Trustee shall serve during the
continued lifetime of the Trust until he or she dies, resigns, is declared
bankrupt or incompetent by a court of appropriate jurisdiction, or is removed,
or, if sooner, until the next meeting of Shareholders called for the purpose of
electing Trustees and until the election and qualification of his or her
successor. In the event that less than the majority of the Trustees holding
office have been elected by the Shareholders, the Trustees then in office shall
call a Shareholders' meeting for the election of Trustees. Any Trustee may
resign at any time by written instrument signed by him and delivered to any
officer of the Trust or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Except to the extent expressly provided in a written agreement with the Trust,
no Trustee resigning and no Trustee removed shall have any right to any
compensation for any period following the effective date of his or her
resignation or removal, or any right to damages on account of such removal. The
Shareholders may elect Trustees at any meeting of Shareholders called by the
Trustees for that purpose. Any Trustee may be removed at any meeting of
Shareholders by a vote of two-thirds of the outstanding Shares of the Trust.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination to serve, resignation, retirement, removal, or incapacity of one or
more Trustees, or all of them, shall not operate to annul the Trust or to revoke
any existing agency created pursuant to the terms of this Declaration of Trust.
Whenever there shall be fewer than the designated number of Trustees, until
additional Trustees are elected or appointed as provided herein to bring the
total number of Trustees equal to the designated number, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust. As conclusive evidence of such vacancy, a written instrument
certifying the existence of such vacancy may be
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executed by an officer of the Trust or by a majority of the Trustees. In the
event of the death, declination, resignation, retirement, removal, or incapacity
of all the then Trustees within a short period of time and without the
opportunity for at least one Trustee being able to appoint additional Trustees
to replace those no longer serving, the Trust's Investment Manager(s) are
empowered to appoint new Trustees subject to the provisions of Section 16(a) of
the 1940 Act.
Section 3. Powers. Subject to the provisions of this Declaration of
Trust, the business of the Trust shall be managed by the Trustees, and the
Trustees shall have all powers necessary or convenient to carry out that
responsibility including the power to engage in securities transactions of all
kinds on behalf of the Trust. Without limiting the foregoing, the Trustees may:
adopt By-Laws not inconsistent with this Declaration of Trust providing for the
regulation and management of the affairs of the Trust and may amend and repeal
them to the extent that such By-Laws do not reserve that right to the
Shareholders; enlarge or reduce their number; remove any Trustee with or without
cause at any time by written instrument signed by at least two-thirds of the
number of Trustees prior to such removal, specifying the date when such removal
shall become effective, and fill vacancies caused by enlargement of their number
or by the death, resignation or removal of a Trustee; elect and remove, with or
without cause, such officers and appoint and terminate such agents as they
consider appropriate; appoint from their own number and establish and terminate
one or more committees consisting of two or more Trustees which may exercise the
powers and authority of the Board of Trustees to the extent that the Trustees
determine; employ one or more custodians of the assets of the Trust and
authorize such custodians to employ subcustodians and to deposit all or any part
of such assets in a system or systems for the central handling of securities or
with a Federal Reserve Bank; retain a transfer agent or a shareholder servicing
agent, or both; provide for the issuance and distribution of Shares by the Trust
directly or through one or more Principal Underwriters or otherwise; redeem,
repurchase and transfer Shares pursuant to applicable law; set record dates for
the determination of Shareholders with respect to various matters; declare and
pay dividends and distributions to Shareholders of each Series from the assets
of such Series; and in general delegate such authority as they consider
desirable to any officer of the Trust, to any committee of the Trustees and to
any agent or employee of the Trust or to any such custodian, transfer or
Shareholder servicing agent, or Principal
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Underwriter. Any determination as to what is in the interests of the Trust made
by the Trustees in good faith shall be conclusive. In construing the provisions
of this Declaration of Trust, the presumption shall be in favor of a grant of
power to the Trustees. Unless otherwise specified herein or in the By-Laws or
required by law, any action by the Trustees shall be deemed effective if
approved or taken by a majority of the Trustees present at a meeting of Trustees
at which a quorum (as defined in the By-Laws as may be amended from time to
time) of Trustees is present, within or without the State of Delaware.
Without limiting the foregoing, the Trustees shall have the power and
authority to cause the Trust (or to act on behalf of the Trust):
(a) To invest and reinvest cash, to hold cash uninvested, and
to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options on,
lend or otherwise deal in or dispose of contracts for the future acquisition or
delivery of fixed income or other securities, and securities of every nature and
kind, including, without limitation, all types of bonds, debentures, stocks,
negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
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(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options (including, options on futures contracts) with respect
to or otherwise deal in any property rights relating to any or all of the assets
of the Trust or any Series;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such Person or Persons as the
Trustees shall deem proper, granting to such Person or Persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;
(d) To exercise powers and right of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or in its
own name or in the name of a custodian or subcustodian or a nominee or nominees
or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depository, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depository or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of the
expenses and compensation of such committee, depository or trustee as the
Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including, but not
limited to, claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
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(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes and in connection therewith issue notes or other
evidence of indebtedness; and to mortgage and pledge the Trust Property or any
part thereof to secure any or all of such indebtedness;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge the
Trust Property or any part thereof to secure any of or all of such obligations;
(1) To purchase and pay for entirely out of Trust Property
such insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, investment adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
Person against liability;
(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans and trusts, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits, for any or
all of the Trustees, officers, employees and agents of the Trust;
(n) To operate as and carry out the business of an investment
company, and exercise all the powers necessary or appropriate to the conduct of
such operations;
(o) To enter into contracts of any kind and description;
(p) To employ one or more banks, trust companies or companies
that are members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Declaration or Trust or in the By-Laws;
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(q) To interpret the investment policies, practices or
limitations of any Series or Class; and
(r) To invest part or all of the Trust Property (or part or
all of the assets of any Series), or to dispose of part or all of the Trust
Property (or part or all of the assets of any Series) and invest the proceeds of
such disposition, in securities issued by one or more other investment companies
registered under the 1940 Act (including investment by means of transfer of part
or all of the Trust Property in exchange for an interest or interests in such
one or more investment companies) all without any requirement of approval by
Shareholders unless required by the 1940 Act. Any such other investment company
may (but need not) be a trust (formed under the laws of the State of Delaware or
of any other state) which is classified as a partnership for federal income tax
purposes.
(s) Subject to the 1940 Act, to engage in any other lawful act
or activity in which a business trust organized under the Delaware Act may
engage.
The Trust shall not be limited to investing in obligations
maturing before the possible termination of the Trust or one or more of its
Series. The Trust shall not in any way be bound or limited by any present or
future law or custom in regard to investment by fiduciaries. The Trust shall not
be required to obtain any court order to deal with any assets of the Trust or
take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust, or partly out of the principal and partly out of income, as they deem
fair, all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, or in connection with the management thereof,
including, but not limited to, the Trustees compensation and such expenses and
charges for the services of the Trust's officers, employees, investment adviser
or manager, Principal Underwriter, auditors, counsel, custodian, transfer agent,
shareholder servicing agent, and such other agents or independent contractors
and such other expenses and charges as the Trustees may deem necessary or proper
to incur, which expenses, fees, charges, taxes and liabilities shall be
allocated in accordance with Article III, Section 6 hereof.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series,
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to pay directly, in advance or arrears, for charges of the Trust's custodian or
transfer, Shareholder servicing or similar agent, an amount fixed from time to
time by the Trustees, by setting off such charges due from such Shareholder from
declared but unpaid dividends owed such Shareholder and/or by reducing the
number of Shares in the account of such Shareholder by that number of full
and/or fractional Shares which represents the outstanding amount of such charges
due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets
of the Trust shall at all times be considered as vested in the Trust, except
that the Trustees shall have power to cause legal title to any Trust Property to
be held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee, he or she shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 7. Service Contracts
(a) Subject to such requirements and restrictions as may be
set forth under federal and/or state law and in the By-Laws, including, without
limitation, the requirements of Section 15 of the 1940 Act, the Trustees may, at
any time and from time to time, contract for exclusive or nonexclusive advisory,
management and/or administrative services for the Trust or for any Series (or
Class thereof) with any corporation, trust, association or other organization;
and any such contract may contain such other terms as the Trustees may
determine, including, without limitation, authority for the Investment Manager
or administrator to delegate certain or all of its duties under such contracts
to qualified investment advisers and administrators and to determine from time
to time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to such
party.
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(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal Underwriter for
the Shares of one or more of the Series (or Classes) or other securities to be
issued by the Trust. Every such contract shall comply with such requirements and
restrictions as may be set forth under federal and/or state law and in the
By-Laws, including, without limitation, the requirements of Section 15 of the
1940 Act; and any such contract may contain such other terms as the Trustees may
determine.
(c) The Trustees are also empowered, at any time and from time
to time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
Shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be set
forth under federal and/or state law and in the By-Laws or stipulated by
resolution of the Trustees.
(d) Subject to applicable law, the Trustees are further
empowered, at any time and from time to time, to contract with any entity to
provide such other services to the Trust or one or more of the Series, as the
Trustees determine to be in the best interests of the Trust and the applicable
Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the
Trust is a shareholder, director, officer, partner, trustee, employee,
Manager, adviser, Principal Underwriter, distributor, or affiliate or
agent of or for any corporation, trust, association, or other
organization, or for any parent or affiliate of any organization with
which an advisory, management or administration contract, or principal
underwriter's or distributor's contract, or transfer, shareholder
servicing or other type of service contract may have been or may
hereafter be made, or that any such organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the Trust, or
that
(ii) any corporation, trust, association or other organization
with which an advisory, management or administration contract or
principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may have been
or may hereafter
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be made also has an advisory, management or administration contract, or
principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other service contract with one or more other
corporations, trusts, associations, or other organizations, or has
other business or interests, shall not affect the validity of any such
contract or disqualify any Shareholder, Trustee or officer of the Trust
from voting upon or executing the same, or create any liability or
accountability to the Trust or its Shareholders, provided approval of
each such contract is made pursuant to the requirements of the 1940
Act.
Section 8. Trustees and Officers as Shareholders. Any Trustee, officer
or agent of the Trust may acquire, own and dispose of Shares to the same extent
as if he were not a Trustee, officer or agent; and the Trustees may issue and
sell and cause to be issued and sold Shares to, and redeem such Shares from, any
such Person or any firm or company in which such Person is interested, subject
only to the general limitations contained herein or in the By-Laws relating to
the sale and redemption of such Shares.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers, Meetings, Notice and Record Dates. The
Shareholders shall have power to vote only (i) for the election or removal of
Trustees as provided in Article IV, Section 1, and (ii) with respect to such
additional matters relating to the Trust as may be required by applicable law,
this Declaration of Trust, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. As determined by the Trustees without the vote
or consent of Shareholders (except as required by the 1940 Act), on any matter
submitted to a vote of Shareholders, either (i) each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote and each
fractional Share shall be entitled to a proportionate fractional vote or (ii)
each dollar of Net Asset Value (number of Shares owned times Net Asset Value per
share of such Series or Class, as applicable) shall be entitled to one vote on
any matter on which such Shares are entitled to vote and each fractional dollar
amount shall be entitled to a proportionate fractional vote. Without limiting
the power of the Trustees in any way to designate otherwise in accordance with
the preceding sentence, the Trustees hereby establish that each whole Share
shall be entitled to one vote as to
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any matter on which it is entitled to vote and each fractional Share shall be
entitled to a proportionate fractional vote.
Notwithstanding any other provision of this Declaration of Trust, on
any matter submitted to a vote of the Shareholders, all Shares of the Trust then
entitled to vote shall be voted in aggregate, except (i) when required by the
1940 Act, Shares shall be voted by individual Series; (ii) when the matter
involves the termination of a Series or any other action that the Trustees have
determined will affect only the interests of one or more Series, then only
Shareholders of such Series shall be entitled to vote thereon; and (iii) when
the matter involves any action that the Trustees have determined will affect
only the interests of one or more Classes, then only the Shareholders of such
Class or Classes shall be entitled to vote thereon. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy may be given in writing. The By-Laws may provide that proxies may also, or
may instead, be given by any electronic or telecommunications device or in any
other manner. Notwithstanding anything else contained herein or in the By-Laws,
in the event a proposal by anyone other than the officers or Trustees of the
Trust is submitted to a vote of the shareholders of one or more Series or
Classes thereof or of the Trust, or in the event of any proxy contest or proxy
solicitation or proposal in opposition to any proposal by the officers or
Trustees of the Trust, Shares may be voted only in person or by written proxy at
a meeting. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, this Declaration of Trust
or the By-Laws to be taken by the Shareholders. Meetings of the Shareholders
shall be called and notice thereof and record dates therefor shall be given and
set as provided in the By-Laws.
Section 2. Quorum and Required Vote. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
forty percent (40%) of the Shares entitled to vote shall constitute a quorum at
a Shareholders' meeting. When any one or more Series (or Class) is to vote as a
single class separate from any other Shares, forty percent (40%) of the Shares
of each such Series (or Class) entitled to vote shall constitute a quorum at a
Shareholders' meeting of that Series (or Class). Except when a larger vote is
required by any provision of this Declaration of Trust or the By-Laws or by
applicable law, when a quorum is present at any meeting, a majority of the
Shares voted shall decide any
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questions and a plurality of the Shares voted shall elect a Trustee, provided
that where any provision of law or of this Declaration of Trust requires that
the holders of any Series shall vote as a Series (or that holders of a Class
shall vote as a Class), then a majority of the Shares of that Series (or Class)
voted on the matter (or a plurality with respect to the election of a Trustee)
shall decide that matter insofar as that Series (or Class) is concerned.
Section 3. Record Dates. For the purpose of determining the
Shareholders of any Series (or Class) who are entitled to receive payment of any
dividend or of any other distribution, the Trustees may from time to time fix a
date, which shall be before the date for the payment of such dividend or such
other payment, as the record date for determining the Shareholders of such
Series (or Class) having the right to receive such dividend or distribution.
Without fixing a record date, the Trustees may for distribution purposes close
the register or transfer books for one or more Series (or Classes) at any time
prior to the payment of a distribution. Nothing in this Section shall be
construed as precluding the Trustees from setting different record dates for
different Series (or Classes).
Section 4. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions and Redemptions
Section 1. Determination of Net Asset Value, Net Income, and
Distributions. Subject to applicable law and Article III, Section 6 hereof, the
Trustees, in their absolute discretion, may prescribe and shall set forth in a
duly adopted vote of the Trustees such bases and time for determining the per
Share or net asset value of the Shares of any Series (or Class) or net income
attributable to the Shares of any Series (or Class), or the declaration and
payment of dividends and distributions on the Shares of any Series (or Class),
as they may deem necessary or desirable.
Section 2. Redemptions and Repurchases.
(a) The Trust shall purchase such Shares as are offered by any
Shareholder for redemption, upon the presentation of a proper instrument of
transfer together with a request directed to the Trust or a Person designated by
the Trust that the Trust purchase such Shares or in accordance with such other
procedures
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for redemption as the Trustees may from time to time authorize; and the Trust
will pay therefor the net asset value thereof as determined by the Trustees (or
on their behalf), in accordance with any applicable provisions of the By-Laws
and applicable law, less any fees imposed on such redemption. Unless
extraordinary circumstances exist, payment for said Shares shall be made by the
Trust to the Shareholder within seven (7) days after the date on which the
request is made in proper form. The obligation set forth in this Section 2 is
subject to the provision that in the event that any time the New York Stock
Exchange (the "Exchange") is closed for other than weekends or holidays, or if
permitted by the rules and regulations or an order of the Commission during
periods when trading on the Exchange is restricted or during any emergency which
makes it impracticable for the Trust to dispose of the investments of the
applicable Series or to determine fairly the value of the net assets held with
respect to such Series or during any other period permitted by order of the
Commission for the protection of investors, such obligations may be suspended or
postponed by the Trustees. In the case of a suspension of the right of
redemption as provided herein, a Shareholder may either withdraw the request for
redemption or receive payment based on the net asset value per share next
determined after the termination of such suspension, less any fees imposed on
such redemption.
(b) The redemption price may in any case or cases be paid wholly or
partly in kind if the Trustees determine that such payment is advisable in the
interest of the remaining Shareholders of the Series for which the Shares are
being redeemed. Subject to the foregoing, the fair value, selection and quantity
of securities or other property so paid or delivered as all or part of the
redemption price may be determined by or under authority of the Trustees. In no
case shall the Trust be liable for any delay of any corporation or other Person
in transferring securities selected for delivery as all or part of any payment
in kind.
(c) The Trustees may require Shareholders to redeem Shares for any
reason under terms set by the Trustees, including, but not limited to, (i) the
determination of the Trustees that direct or indirect ownership of Shares of any
Series has or may become concentrated in such Shareholder to an extent that
would disqualify any Series as a regulated investment company under the Internal
Revenue Code of 1986, as amended (or any successor statute thereto), (ii) the
failure of a Shareholder to supply a tax identification number if required to do
so, or to have the minimum investment required (which may vary
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by Series), or (iii) the failure of a Shareholder to pay when due for the
purchase of Shares issued to him. Any such redemption shall be effected at the
redemption price and in the manner provided in this Article VI.
(d) The holders of Shares shall upon demand disclose to the Trustees in
writing such information with respect to direct and indirect ownership of Shares
as the Trustees deem necessary to comply with the provisions of the Internal
Revenue Code of 1986, as amended (or any successor statute thereto), or to
comply with the requirements of any other taxing authority.
ARTICLE VII
Compensation and Limitation of
Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. A Trustee, when
acting in such capacity, shall not be personally liable to any Person, other
than the Trust or a Shareholder to the extent provided in this Article VII, for
any act, omission or obligation of the Trust, of such Trustee or of any other
Trustee. The Trustees shall not be responsible or liable in any event for any
neglect or wrongdoing of any officer, agent, employee, Manager, adviser,
sub-adviser or Principal Underwriter of the Trust. The Trust shall indemnify
each Person who is, or has been, a Trustee, officer, employee or agent of the
Trust and any Person who is serving or has served at the Trust's request as a
director, officer, trustee, employee or agent of another organization in which
the Trust has any interest as a shareholder, creditor or otherwise to the extent
and in the manner provided in the By-Laws.
All persons extending credit to, contracting with or having any claim
against the Trust or the Trustees shall look only to the assets of the Series
that such person extended credit to, contracted with or has a claim against, or,
if the Trustees have yet to establish Series, of the Trust for payment under
such credit, contract or claim; and neither the Trustees nor the Shareholders,
nor any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor.
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<PAGE> 25
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees by any of them in connection with the Trust shall
conclusively be deemed to have been executed or done only in or with respect to
his or their capacity as Trustee or Trustees, and such Trustee or Trustees shall
not be personally liable thereon. At the Trustees' discretion, any note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or by any officer or officers may give notice that the Certificate of Trust is
on file in the Office of the Secretary of State of the State of Delaware and
that a limitation on liability of Series exists and such note, bond, contract,
instrument, certificate or undertaking may, if the Trustees so determine, recite
that the same was executed or made on behalf of the Trust by a Trustee or
Trustees in such capacity and not individually or by an officer or officers in
such capacity and not individually and that the obligations of such instrument
are not binding upon any of them or the Shareholders individually but are
binding only on the assets and property of the Trust or a Series thereof, and
may contain such further recital as such Person or Persons may deem appropriate.
The omission of any such notice or recital shall in no way operate to bind any
Trustees, officers or Shareholders individually.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety. The exercise by the Trustees of their powers and discretions hereunder
shall be binding upon everyone interested. A Trustee shall be liable to the
Trust and to any Shareholder solely for his or her own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and shall be under no liability for any act or omission in accordance with such
advice nor for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and empowered to
the fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee, officer, employee or agent of the Trust in connection with
any claim, action, suit or proceeding in which he or she becomes involved by
virtue of his or her capacity or former capacity with the Trust.
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<PAGE> 26
ARTICLE VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 2. Termination of Trust or Series.
(a) Unless terminated as provided herein, the Trust shall continue
without limitation of time. The Trust may be terminated at any time by vote of a
majority of the Shares of each Series entitled to vote, voting separately by
Series, or by the Trustees by written notice to the Shareholders. Any Series of
Shares or Class thereof may be terminated at any time by vote of a majority of
the Shares of such Series or Class entitled to vote or by the Trustees by
written notice to the Shareholders of such Series or Class.
(b) Upon the requisite Shareholder vote or action by the Trustees to
terminate the Trust or any one or more Series of Shares or any Class thereof,
after paying or otherwise providing for all charges, taxes, expenses and
liabilities, whether due or accrued or anticipated, of the Trust or of the
particular Series or any Class thereof as may be determined by the Trustees, the
Trust shall in accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets of the Trust or of the affected Series
or Class to distributable form in cash or Shares (if any Series remain) or other
securities, or any combination thereof, and distribute the proceeds to the
Shareholders of the Series or Classes involved, ratably according to the number
of Shares of such Series or Class held by the several Shareholders of such
Series or Class on the date of distribution. Thereupon, the Trust or any
affected Series or Class shall terminate and the Trustees and the Trust shall be
discharged of any and all further liabilities and duties relating thereto or
arising therefrom, and the right, title and interest of all parties with respect
to the Trust or such Series or Class shall be canceled and discharged.
(c) Upon termination of the Trust, following completion of winding up
of its business, the Trustees shall cause a certificate of cancellation of the
Trust's Certificate of Trust to be filed in accordance with the Delaware Act,
which certificate of cancellation may be signed by any one Trustee.
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<PAGE> 27
Section 3. Reorganization and Master/Feeder
(a) Notwithstanding anything else herein, the Trustees may, without
Shareholder approval unless such approval is required by applicable law, (i)
cause the Trust to merge or consolidate with or into one or more trusts (or
series thereof to the extent permitted by law), partnerships, associations,
corporations or other business entities (including trusts, partnerships,
associations, corporations or other business entities created by the Trustees to
accomplish such merger or consolidation) so long as the surviving or resulting
entity is an open-end management investment company under the 1940 Act, or is a
series thereof, that will succeed to or assume the Trust's registration under
the 1940 Act and that is formed, organized or existing under the laws of the
United States or of a state, commonwealth, possession or colony of the United
States, (ii) cause the Shares to be exchanged under or pursuant to any state or
federal statute to the extent permitted by law or (iii) cause the Trust to
incorporate under the laws of Delaware. Any agreement of merger or consolidation
or exchange or certificate of merger may be signed by a majority of the Trustees
and facsimile signatures conveyed by electronic or telecommunication means shall
be valid.
(b) Pursuant to and in accordance with the provisions of Section
3815(f) of the Delaware Act, and notwithstanding anything to the contrary
contained in this Declaration of Trust, an agreement of merger or consolidation
approved by the Trustees in accordance with this Section 3 may effect any
amendment to the governing instrument of the Trust or effect the adoption of a
new trust instrument of the Trust if the Trust is the surviving or resulting
trust in the merger or consolidation.
(c) The Trustees may create one or more business trusts to which all or
any part of the assets, liabilities, profits or losses of the Trust or any
Series or class thereof may be transferred and may provide for the conversion of
Shares in the Trust or any Series or Class thereof into beneficial interests in
any such newly created trust or trusts or any series or classes thereof.
(d) Notwithstanding anything else herein, the Trustees may, without
Shareholder approval, invest all or a portion of the Trust Property of any
Series, or dispose of all or a portion of the Trust Property of any Series, and
invest the proceeds of such disposition in interests issued by one or more other
investment companies registered under the 1940 Act. Any such other investment
company may (but need not) be a trust (formed under the laws of the State of
Delaware or any other state or jurisdiction) (or subtrust
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<PAGE> 28
thereof) which is classified as a partnership for federal income tax purposes.
Notwithstanding anything else herein, the Trustees may, without Shareholder
approval unless such approval is required by applicable law, cause a Series that
is organized in the master/feeder fund structure to withdraw or redeem its Trust
Property from the master fund and cause such series to invest its Trust Property
directly in securities and other financial instruments or in another master
fund.
Section 4. Amendments. Except as specifically provided in this Section,
the Trustees may, without Shareholder vote, restate, amend or otherwise
supplement this Declaration of Trust. Shareholders shall have the right to vote
(i) on any amendment that would affect their right to vote granted in Article V,
Section 1 hereof, (ii) on any amendment to this Section 4 of Article VIII, (iii)
on any amendment that may be required to be approved by Shareholders by
applicable law or by the Trust's registration statement filed with the
Commission and (iv) on any amendment submitted to them by the Trustees. Any
amendment required or permitted to be submitted to the Shareholders that, as the
Trustees determine, shall affect the Shareholders of one or more Series shall be
authorized by a vote of the Shareholders of each Series affected and no vote of
Shareholders of a Series not affected shall be required. Notwithstanding
anything else herein, no amendment hereof shall limit the rights to insurance
provided by Article VII, Section 4 with respect to any acts or omissions of
Persons covered thereby prior to such amendment nor shall any such amendment
limit the rights to indemnification referenced in Article VII, Section 2 hereof
as provided in the By-Laws with respect to any actions or omissions of Persons
covered thereby prior to such amendment. The Trustees may, without Shareholder
vote, restate, amend, or otherwise supplement the Certificate of Trust as they
deem necessary or desirable.
Section 5. Filing of Copies, References, Headings. The original or a
copy of this instrument and of each restatement and/or amendment hereto shall be
kept at the office of the Trust where it may be inspected by any Shareholder.
Anyone dealing with the Trust may rely on a certificate by an officer of the
Trust as to whether or not any such restatements and/or amendments have been
made and as to any matters in connection with the Trust hereunder; and, with the
same effect as if it were the original, may rely on a copy certified by an
officer of the Trust to be a copy of this instrument or of any such restatements
and/or amendments. In this instrument and in any such restatements and/or
amendments,
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<PAGE> 29
references to this instrument, and all expressions such as "herein", "hereof"
and "hereunder", shall be deemed to refer to this instrument as amended or
affected by any such restatements and/or amendments. Headings are placed herein
for convenience of reference only and shall not be taken as a part hereof or
control or affect the meaning, construction or effect of this instrument.
Whenever the singular number is used herein, the same shall include the plural;
and the neuter, masculine and feminine genders shall include each other, as
applicable. This instrument may be executed in any number of counterparts each
of which shall be deemed an original.
Section 6. Applicable Law.
(a) The Trust is created under, and this Declaration of Trust is to be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware. The Trust shall be of the type commonly called a business
trust, and without limiting the provisions hereof, the Trust specifically
reserves the right to exercise any of the powers or privileges afforded to
business trusts or actions that may be engaged in by business trusts under the
Delaware Act, and the absence of a specific reference herein to any such power,
privilege or action shall not imply that the Trust may not exercise such power
or privilege or take such actions.
(b) Notwithstanding the first sentence of Section 6(a) of this Article
VIII, there shall not be applicable to the Trust, the Trustees or this
Declaration of Trust (x) the provisions of Section 3540 of Title 12 of the
Delaware Code or (y) any provisions of the laws (statutory or common) of the
State of Delaware (other than the Delaware Act) pertaining to trusts that relate
to or regulate: (i) the filing with any court or governmental body or agency of
trustee accounts or schedules of trustee fees and charges, (ii) affirmative
requirements to post bonds for trustees, officers, agents or employees of a
trust, (iii) the necessity for obtaining a court or other governmental approval
concerning the acquisition, holding or disposition of real or personal property,
(iv) fees or other sums applicable to trustees, officers, agents or employees of
a trust, (v) the allocation of receipts and expenditures to income or principal,
(vi) restrictions or limitations on the permissible nature, amount or
concentration of trust investments or requirements relating to the titling,
storage or other manner of holding of trust assets, or (vii) the establishment
of fiduciary or other standards or responsibilities or limitations on the acts
or powers of trustees that are inconsistent with the
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<PAGE> 30
limitations or liabilities or authorities and powers of the Trustees set forth
or referenced in this Declaration of Trust.
Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable, and if
the Trustees shall determine, with the advice of counsel, that any of such
provision is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code of 1986, as amended (or any successor
statute thereto), and the regulations thereunder, the Delaware Act or with other
applicable laws and regulations, the conflicting provision shall be deemed never
to have constituted a part of the Declaration of Trust; provided, however, that
such determination shall not affect any of the remaining provisions of the
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination.
(b) If any provision of the Declaration of Trust shall be held invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration of Trust in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the Trustees to
create a business trust pursuant to the Delaware Act. It is not the intention of
the Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, or any form of legal relationship other than
a business trust pursuant to the Delaware Act. Nothing in this Declaration of
Trust shall be construed to make the Shareholders, either by themselves or with
the Trustees, partners or members of a joint stock association.
Section 9. Derivative Actions. In addition to the requirements set
forth in Section 3816 of the Delaware Act, a Shareholder may bring a derivative
action on behalf of the Trust only if the following conditions are met:
(a) The Shareholder or Shareholders must make a pre-suit demand upon
the Trustees to bring the subject action unless an effort to cause the Trustees
to bring such an action is not likely to succeed. For purposes of this Section
9(a), a demand on the Trustees shall only be deemed not likely to succeed and
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<PAGE> 31
therefore excused if a majority of the Board of Trustees, or a majority of any
committee established to consider the merits of such action, has a personal
financial interest in the transaction at issue, and a Trustee shall not be
deemed interested in a transaction or otherwise disqualified from ruling on the
merits of a Shareholder demand by virtue of the fact that such Trustee receives
remuneration for his service on the Board of Trustees of the Trust or on the
boards of one or more trusts that are under common management with or otherwise
affiliated with the Trust.
(b) Unless a demand is not required under paragraph (a) of this Section
9, Shareholders eligible to bring such derivative action under the Delaware Act
who collectively hold at least 10% of the Outstanding Shares of the Trust, or
who collectively hold at least 10% of the Outstanding Shares of the Series or
Class to which such action relates, shall join in the request for the Trustees
to commence such action; and
(c) Unless a demand is not required under paragraph (a) of this Section
9, the Trustees must be afforded a reasonable amount of time to consider such
shareholder request and to investigate the basis of such claim. The Trustees
shall be entitled to retain counsel or other advisors in considering the merits
of the request and shall require an undertaking by the Shareholders making such
request to reimburse the Trust for the expense of any such advisors in the event
that the Trustees determine not to bring such action.
For purposes of this Section 9, the Board of Trustees may designate a
committee of one Trustee to consider a Shareholder demand if necessary to create
a committee with a majority of Trustees who do not have a personal financial
interest in the transaction at issue. The Trustees shall be entitled to retain
counsel or other advisors in considering the merits of the request and may
require an undertaking by the Shareholders making such request to reimburse the
Trust for the expense of any such advisors in the event that the Trustees
determine not to bring such action.
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<PAGE> 32
IN WITNESS WHEREOF, the Trustees named below does hereby make and enter
into this Declaration of Trust as of the 29th day of July, 1998.
/S/ David F. Connor
- ----------------------------------
David F. Connor
/S/ S. Jane Rose
- ----------------------------------
S. Jane Rose
/S/ Robert C. Rosselot
- ----------------------------------
Robert C. Rosselot
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS:
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
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<PAGE> 1
EXHIBIT 2
BY-LAWS
OF
PRUDENTIAL DIVERSIFIED SERIES
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - AGREEMENT AND DECLARATION OF TRUST ........................... 1
Section 1. Agreement and Declaration
of Trust ............................................. 1
Section 2. Definitions ............................................ 1
ARTICLE II - OFFICES ..................................................... 1
Section 1. Principal Office ....................................... 1
Section 2. Registered Office and Other Office ..................... 1
ARTICLE III - SHAREHOLDERS ............................................... 1
Section 1. Meetings ............................................... 1
Section 2. Notice of Meetings ..................................... 2
Section 3. Record Date for Meetings ............................... 2
Section 4. Proxies ................................................ 2
Section 5. Inspection of Books .................................... 3
Section 6. Action without Meeting ................................. 3
Section 7. Application of this Article ............................ 4
ARTICLE IV - TRUSTEES .................................................... 4
Section 1. Meetings of the Trustees ............................... 4
Section 2. Quorum and Manner of Acting ............................ 5
ARTICLE V - COMMITTEES ................................................... 5
Section 1. Executive and Other Committees ......................... 5
Section 2. Meetings, Quorum and Manner of Acting .................. 5
ARTICLE VI - OFFICERS .................................................... 6
Section 1. General Provisions ..................................... 6
Section 2. Term of Office and Qualifications ...................... 6
Section 3. Removal ................................................ 6
Section 4. Powers and Duties of the Chairman ...................... 6
Section 5. Powers and Duties of the President ..................... 7
Section 6. Powers and Duties of the Vice
President ............................................ 7
Section 7. Powers and Duties of the Treasurer ..................... 7
Section 8. Powers and Duties of the Secretary ..................... 8
Section 9. Powers and Duties of Assistant
Treasurers ........................................... 8
Section 10. Powers and Duties of Assistant
Secretaries .......................................... 8
Section 11. Compensation of Officers and
Trustees ........................................ 8
ARTICLE VII - FISCAL YEAR ................................................ 9
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VIII - SEAL ..................................................... 9
ARTICLE IX - WAIVERS OF NOTICE .......................................... 9
ARTICLE X - CUSTODY OF SECURITIES ....................................... 9
Section 1. Employment of a Custodian .............................. 9
Section 2. Action upon Termination of Custodian Agreement ......... 9
Section 3. Provisions of Custodian Contract ....................... 10
Section 4. Central Certificate System ............................. 10
ARTICLE XI - INDEMNIFICATION OF TRUSTEES, OFFICERS, EMPLOYEES AND
OTHER AGENTS ............................................... 11
Section 1. Agents, Proceedings, Expenses .......................... 11
Section 2. Indemnification ........................................ 11
Section 3. Limitations, Settlements ............................... 11
Section 4. Insurance, Rights Not Exclusive ........................ 12
Section 5. Advance of Expenses .................................... 12
Section 6. Fiduciaries of Employee Benefit Plan ................... 13
ARTICLE XII - AMENDMENTS ................................................ 13
</TABLE>
(ii)
<PAGE> 4
BY-LAWS
OF
PRUDENTIAL DIVERSIFIED SERIES
ARTICLE I
Agreement and Declaration of Trust
Section 1. Agreement and Declaration of Trust. These By-Laws shall be
subject to the Agreement and Declaration of Trust, as from time to time
amended, supplemented or restated (the "Declaration of Trust") of Prudential
Diversified Series (the "Trust").
Section 2. Definitions. Unless otherwise defined herein, the terms used
herein have the respective meanings given them in the Declaration of Trust.
ARTICLE II
Offices
Section 1. Principal Office. The principal office of the Trust shall be
located in the City of Newark, State of New Jersey, or such other location as
the Trustees may from time to time determine. Section 2. Registered Office
and Other Offices. The registered office of the Trust shall be located in the
City of Wilmington, State of Delaware or such other location within the State
of Delaware as the Trustees may from time to time determine. The Trust may
establish and maintain such other offices and places of business as the
Trustees may from time to time determine.
ARTICLE III
Shareholders
Section 1. Meetings. Meetings of the Shareholders shall be held at the
principal executive offices of the Trust or at such other place within the
United States of America as the Trustees shall designate. Meetings of the
Shareholders shall be called by the Secretary whenever (i) ordered by the
Trustees or (ii) for the purpose of voting on the removal of any Trustee,
requested in writing by Shareholders holding at least ten percent (10%) of
the outstanding Shares entitled to vote. If the Secretary, when so ordered or
requested, refuses or neglects for more than 10 days to call such meetings,
the Trustees or the
<PAGE> 5
Shareholders so requesting, may, in the name of the Secretary, call the meeting
by giving notice thereof in the manner required when notice is given by the
Secretary.
Section 2. Notice of Meetings. Except as otherwise herein provided,
notice of all meetings of the Shareholders, stating the time, place and
purposes of the meeting, shall be given by the Secretary by delivering or
mailing, postage prepaid, to each Shareholder entitled to vote at said
meeting at his or her address as recorded on the register of the Trust at
least ten (10) days and not more than ninety (90) days before the meeting.
Only the business stated in the notice of the meeting shall be considered at
such meeting. Notice of adjournment of a Shareholders' meeting to another
time or place need not be given, if such time and place are announced at the
meeting and the adjourned meeting is held within a reasonable time after the
date set for the original meeting. No notice need be given to any Shareholder
who shall have failed to inform the Trust of his or her current address or if
a written waiver of notice, executed before or after the meeting by the
Shareholder or his or her attorney thereunto authorized, is filed with the
records of the meeting.
Section 3. Record Date for Meetings. For the purpose of determining the
Shareholders who are entitled to notice of and to vote at any meeting, the
Trustees may from time to time close the transfer books for such period, not
exceeding thirty (30) days, as the Trustees may determine; or without closing
the transfer books the Trustees may fix a date not more than ninety (90) days
prior to the date of any meeting of Shareholders as a record date for the
determination of the persons to be treated as Shareholders of record for such
purpose.
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote either in person or by written proxy signed
by the Shareholder, provided that no proxy shall be voted at any meeting
unless it shall have been placed on file with the Secretary, or with such
other officer or agent of the Trust as the Secretary may direct, for
verification prior to the time at which such vote shall be taken; provided,
however, that notwithstanding any other provision of this Section 4 to the
contrary, the Trustees may at any time adopt one or more electronic,
telecommunication, telephonic, computerized or other alternatives to
execution of a written instrument that will enable holders of Shares entitled
to vote at any meeting to appoint a proxy to vote such holders' Shares at
such meeting. Proxies may be solicited in
2
<PAGE> 6
the name of one or more Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. When any Share is held
jointly by several persons, any one of them may vote at any meeting in person or
by proxy in respect of such Share, but if more than one of them shall be present
at such meeting in person or by proxy, and such joint owners or their proxies so
present disagree as to any vote to be cast, such vote shall not be received in
respect of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. If the holder
of any such Share is a minor or a person of unsound mind, and subject to
guardianship or the legal control of any other person as regards the charge or
management of such Share, he or she may vote by his or her guardian or such
other person appointed or having such control, and such vote may be given in
person or by proxy. At all meetings of the Shareholders, unless the voting is
conducted by inspectors, all questions relating to the qualifications of voters,
the validity of proxies, and the acceptance or rejection of votes shall be
decided by the chairman of the meeting. Except as otherwise provided herein or
in the Declaration of Trust, all matters relating to the giving, voting or
validity of proxies shall be governed by the General Corporation Law of the
State of Delaware relating to proxies, and judicial interpretations thereunder,
as if the Trust were a Delaware corporation and the Shareholders were
shareholders of a Delaware corporation.
Section 5. Inspection of Books. The Trustees shall from time to time
determine whether and to what extent, and at what times and places, and under
what conditions and regulations the accounts and books of the Trust or any of
them shall be open to the inspection of the Shareholders; and no Shareholder
shall have any right to inspect any account or book or document of the Trust
except as conferred by law or otherwise by the Trustees or by resolution of
the Shareholders.
Section 6. Action Without Meeting. Any action that may be taken at any
meeting of Shareholders may be taken without a meeting and without prior
notice if a consent in writing setting forth the action so taken is signed by
the holders of outstanding Shares having not less than the minimum number of
votes that would be necessary to authorize or take that action at a meeting
at which all Shares entitled to vote on that action were present and voted.
All such consents shall be filed with the records of Shareholder meetings.
Such consents shall be treated for all purposes as a vote taken at a meeting
of Shareholders.
3
<PAGE> 7
Section 7. Application of this Article. Meetings of Shareholders shall
consist of Shareholders of any Series (or Class thereof) or of all
Shareholders, as determined pursuant to the Declaration of Trust, and this
Article shall be construed accordingly.
ARTICLE IV
Trustees
Section 1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the Chairman, the President,
or by any two of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer or Trustees calling
the meeting and shall be delivered or mailed, postage prepaid, to each Trustee
at least two days before the meeting, or shall be telegraphed, cabled, or wired
to each Trustee at his or her business address, or personally delivered to him
or her, at least one day before the meeting. Such notice may, however, be waived
by any Trustees. Notice of a meeting need not be given to any Trustee if a
written waiver of notice, executed by him or her before or after the meeting, is
filed with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him or her. A notice or waiver of notice need not specify the purpose of any
meeting. The Trustees may meet by means of a telephone conference circuit or
similar communications equipment by means of which all persons participating in
the meeting are connected, which meeting shall be deemed to have been held at a
place designated by the Trustees at the meeting. Participation in a telephone
conference meeting shall constitute presence in person at such meeting. Any
action required or permitted to be taken at any meeting of the Trustees may be
taken by the Trustees without a meeting if a majority of the Trustees then in
office (or such higher number of Trustees as would be required to act on the
matter under the Declaration of Trust, these By-Laws or applicable law if a
meeting were held) consent to the action in writing and the written consents are
filed with the records of the Trustees' meetings. Such consents shall be treated
for all purposes as a vote taken at a meeting of the
4
<PAGE> 8
Trustees. Notwithstanding the foregoing, all actions of the Trustees shall be
taken in compliance with the provisions of the Investment Company Act of 1940,
as amended.
Section 2. Quorum and Manner of Acting. A majority of the Trustees then
in office shall constitute a quorum for the transaction of business. If at
any meeting of the Trustees 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 be obtained. Notice of an adjourned meeting need not be given.
The act of the majority of the Trustees present at any meeting at which there
is a quorum shall be the act of the Trustees, except as may be otherwise
specifically provided by law or by the Declaration of Trust or by these
By-Laws.
ARTICLE V
Committees
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at
the pleasure of the Trustees, which shall have the power to conduct the
current and ordinary business of the Trust while the Trustees are not in
session, including the purchase and sale of securities and the designation of
securities to be delivered upon redemption of Shares of the Trust, and such
other powers of the Trustees as the Trustees may, from time to time, delegate
to them except those powers by law, the Declaration of Trust or these By-laws
they are prohibited from delegating. The Trustees may also elect from their
own number or otherwise other Committees from time to time, the number
composing such Committees, the powers conferred upon the same (subject to the
same limitations as with respect to the Executive Committee), the terms of
membership on such Committees and the termination or circumstances giving
rise to the termination of such Committees to be determined by the Trustees.
The Trustees may designate a chairman of any such Committee. In the absence
of such designation the Committee may elect its own chairman.
Section 2. Meetings, Quorum and Manner of Acting. The Trustees may (1)
provide for stated meetings of any Committees, (2) specify the manner of
calling and notice required for special meeting of any Committee, (3) specify
the number of members of a Committee required to constitute a quorum and the
numbers of members of a Committee required to exercise specified powers
delegated to such
5
<PAGE> 9
Committee, (4) authorize the making of decisions to exercise specified powers by
written assent of the requisite number of members of a Committee without a
meeting, and (5) authorize the members of a Committee to meet by means of a
telephone conference circuit. Each Committee shall keep regular minutes of its
meetings and records of decisions taken without a meeting and cause them to be
recorded in a book designated for that purpose and kept at the principal
executive offices of the Trust.
ARTICLE VI
Officers
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the
Trustees. The Trustees may elect or appoint such other officers or agents as
the business of the Trust may require, including a Chairman of the Board
("Chairman"), one or more Vice Presidents, one or more Assistant Secretaries,
and one or more Assistant Treasurers. The Trustees may delegate to any
officer or Committee the power to appoint any subordinate officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise
provided by law, the Declaration of Trust or these By-Laws, the President,
the Treasurer and the Secretary, and all other officers shall hold office at
the pleasure of the Trustees. The Secretary and Treasurer may be the same
person. A Vice President and the Treasurer or a Vice President and the
Secretary may be the same person, but the offices of Vice President,
Secretary and Treasurer shall not be held by the same person. The President
shall hold no other office, but may be a Trustee of the Trust. Except as
above provided, any two offices may be held by the same person. The Chairman,
if there be one, shall be a Trustee and may but need not be a Shareholder.
Any other officer may be but none need be a Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer with or without cause, by a vote of a
majority of the Trustees then in office. Any officer or agent appointed by an
officer or committee may be removed with or without cause by such appointing
officer or committee.
Section 4. Powers and Duties of the Chairman. The Chairman, if such an
officer is elected, shall if present preside at meetings of the Shareholders
and the Trustees, shall be the chief executive officer of the Trust and
shall, subject to the control of the Trustees, have general supervision,
direction and control
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<PAGE> 10
of the business and the officers of the Trust and exercise and perform such
other powers and duties as may be from time to time assigned to him by the
Trustees or prescribed by the Declaration of Trust or these By-Laws.
Section 5. Powers and Duties of the President. Subject to the powers of
the Chairman, if there be such an officer, the President shall be the
principal executive officer of the Trust. He or she may call meetings of the
Trustees and of any Committee thereof when he or she deems it necessary and,
in the absence of the Chairman, shall preside at all meetings of the
Shareholders and the Trustees. Subject to the control of the Trustees, the
Chairman and any Committees of the Trustees, within their respective spheres,
as provided by the Trustees, the President shall at all times exercise a
general supervision and direction over the affairs of the Trust. The
President shall have the power to employ attorneys, accountants and other
advisers and agents for the Trust and to employ such subordinate officers,
agents, clerks and employees as he or she may find necessary to transact the
business of the Trust. He or she shall also have the power to grant, issue,
execute or sign such powers of attorney, proxies or other documents as may be
deemed advisable or necessary in furtherance of the interests of the Trust.
The President shall have such other powers and duties as from time to time
may be conferred upon or assigned to him or her by the Trustees.
Section 6. Powers and Duties of the Vice President. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform
all the duties and may exercise any of the powers of the President, subject
to the control of the Trustees. Each Vice President shall perform such other
duties as may be assigned to him or her from time to time by the Trustees or
the President.
Section 7. Powers and Duties of the Treasurer. The Treasurer shall be
the principal financial and accounting officer of the Trust. The Treasurer
shall deliver all funds of the Trust which may come into his or her hands to
such Custodian as the Trustees may employ pursuant to Article X of these
By-Laws. He or she shall render a statement of condition of the finances of
the Trust to the Trustee as often as they shall require the same and he or
she shall in general perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him
or her by the Trustees. The Treasurer
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<PAGE> 11
shall give a bond for the faithful discharge of his or her duties, if required
so to do by the Trustees, in such sum and with such surety or sureties as the
Trustees shall require.
Section 8. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Trustees and of the Shareholders in proper
books provided for that purpose; he or she shall have custody of the seal of
the Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. The
Secretary shall attend to the giving and serving of all notices by the Trust
in accordance with the provisions of these By-laws and as required by law;
and subject to these By-Laws, he or she shall in general perform all duties
incident to the office of the Secretary and such other duties as from time to
time may be assigned to him or her by the Trustees.
Section 9. Powers and Duties of Assistant Treasurers. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Treasurer. Each Assistant Treasurer shall perform such other duties as
from time to time may be assigned to him or her by the Trustees. Each
Assistant Treasurer shall give a bond for the faithful discharge of his or
her duties, if required so to do by the Trustees, in such sum and with such
surety or sureties as the Trustees shall require.
Section 10. Powers and Duties of Assistant Secretaries. In the absence
or disability of the Secretary, any Assistant Secretary designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Secretary. Each Assistant Secretary shall perform such other duties as
from time to time may be assigned to him or her by the Trustees.
Section 11. Compensation of Officers and Trustees. Subject to any
applicable provisions of the Declaration of Trust, the compensation of the
officers and Trustees shall be fixed from time to time by the Trustees or, in
the case of officers, by any Committee or officer upon whom such power may be
conferred by the Trustees. No officer shall be prevented from receiving such
compensation as such officer by reason of the fact that he or she is also a
Trustee.
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<PAGE> 12
ARTICLE VII
Fiscal Year
The fiscal year of the Trust shall end on such date as the Trustees
shall from time to time determine.
ARTICLE VIII
Seal
The Trustees may adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
Waivers of Notice
Whenever any notice whatever is required to be given by law, the
Declaration of Trust or these By-laws, a waiver thereof in writing, signed by
the person or persons entitled to said notice, whether before or after the
time stated therein, shall be deemed equivalent thereto. A notice shall be
deemed to have been telegraphed, cabled or wired for the purposes of these
By-Laws when it has been delivered to a representative of any telegraph,
cable or wire company with instructions that it be telegraphed, cabled or
wired.
ARTICLE X
Custody of Securities
Section 1. Employment of a Custodian. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having
not less than $20,000,000 aggregate capital, surplus and undivided profits
and shall be appointed from time to time by the Trustees, who shall fix its
remuneration.
Section 2. Action upon Termination of Custodian Agreement. Upon
termination of a Custodian Agreement or inability of the Custodian to
continue to serve, the Trustees shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the
required
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<PAGE> 13
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trust
shall function without a custodian or shall be liquidated. If so directed by a
vote of holders of the majority of the outstanding Shares entitled to vote, the
Custodian shall deliver and pay over all Trust Property held by it as specified
in such vote.
Section 3. Provisions of Custodian Contract. The following provisions
shall apply to the employment of a Custodian and to any contract entered into
with the Custodian so employed: The Trustees shall cause to be delivered to
the Custodian all securities included in the Trust Property or to which the
Trust may become entitled, and shall order the same to be delivered by the
Custodian only in completion of a sale, exchange, transfer, pledge, loan of
portfolio securities to another person, or other disposition thereof, all as
the Trustees may generally or from time to time require or approve or to a
successor Custodian; and the Trustees shall cause all funds included in the
Trust Property or to which it may become entitled to be paid to the
Custodian, and shall order the same disbursed only for investment against
delivery of the securities acquired (including securities acquired under a
repurchase agreement), or the return of cash held as collateral for loans of
portfolio securities, or in payment of expenses, including management
compensation, and liabilities of the Trust, including distributions to
Shareholders, or to a successor Custodian. Notwithstanding anything to the
contrary to these By-Laws, upon receipt of proper instructions, which may be
standing instructions, the Custodian may deliver funds in the following
cases: In connection with repurchase agreements, the Custodian shall transmit
prior to receipt on behalf of the Fund of any securities or other property,
funds from the Fund's custodian account to a special custodian approved by
the Trustees of the Fund, which funds shall be used to pay for securities to
be purchased by the Fund subject to the Fund's obligation to sell and the
seller's obligation to repurchase such securities (in such case, the
securities shall be held in the custody of the special custodian); in
connection with the Trust's purchase or sale of financial futures contracts,
the Custodian shall transmit, prior to receipt on behalf of the Fund of any
securities or other property, funds from the Trust's custodian account in
order to furnish and to maintain funds with brokers as margin to guarantee
the performance of the Trust's futures obligations in accordance with the
applicable requirements of commodities exchanges and brokers.
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<PAGE> 14
Section 4. Central Certificate System. Subject to applicable rules,
regulations and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in
a system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or
series of any issuer deposited within the system are treated as fungible and
may be transferred or pledged by bookkeeping entry without physical delivery
of such securities, provided that all such deposits shall be subject to
withdrawal only upon the order of the Trust.
ARTICLE XI
Indemnification of Trustees, Officers,
Employees and Other Agents
Section 1. Agents, Proceedings, Expenses. For the purpose of this
Article, "agent" means any Person who is or was a Trustee, officer, employee
or other agent of the Trust or is or was serving at the request of the Trust
as a trustee, director, officer, employee or agent of another organization in
which the Trust has any interest as a shareholder, creditor or otherwise;
"proceeding" means any threatened, pending or completed claim, action, suit
or proceeding, whether civil, criminal, administrative or investigative
(including appeals); and "expenses" includes, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and all
other liabilities whatsoever.
Section 2. Indemnification. Subject to the exceptions and limitation
contained in Section 3 below, every agent shall be indemnified by the Trust
to the fullest extent permitted by law against all liabilities and against
all expenses reasonably incurred or paid by him or her in connection with any
proceeding in which he or she becomes involved as a party or otherwise by
virtue of his or her being or having been an agent.
Section 3. Limitations, Settlements. No indemnification shall be
provided hereunder to an agent:
(a) who shall have been adjudicated by the court or other body before
which the proceeding was brought to be liable to the Trust or its Shareholders
by reason of willful misfeasance, bad faith, gross
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<PAGE> 15
negligence or reckless disregard of the duties involved in the conduct of his or
her office (collectively, "disabling conduct"); or
(b) with respect to any proceeding disposed of (whether by settlement,
pursuant to a consent decree or otherwise) without an adjudication by the
court or other body before which the proceeding was brought that such agent
was liable to the Trust or its Shareholders by reason of disabling conduct,
unless there has been a determination that such agent did not engage in
disabling conduct:
(i) by the court or other body before which the proceeding was brought;
(ii) by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor are parties to the proceeding based upon
a review of readily available facts (as opposed to a full trial-type
inquiry); or
(iii) by written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full trial-type inquiry);
provided, however, that indemnification shall be provided hereunder to an
agent with respect to any proceeding in the event of (1) a final decision on
the merits by the court or other body before which the proceeding was brought
that the agent was not liable by reason of disabling conduct, or (2) the
dismissal of the proceeding by the court or other body before which it was
brought for insufficiency of evidence of any disabling conduct with which
such agent has been charged.
Section 4. Insurance, Rights Not Exclusive. The rights of
indemnification herein provided may be insured against by policies maintained
by the Trust on behalf of any agent, shall be severable, shall not be
exclusive of or affect any other rights to which any agent may now or
hereafter be entitled and shall inure to the benefit of the heirs, executors
and administrators of any agent.
Section 5. Advance of Expenses. Expenses incurred by an agent in
connection with the preparation and presentation of a defense to any
proceeding may be paid by the Trust from time to time prior to final
disposition thereof upon receipt of an undertaking by or on behalf of such
agent that such amount will be paid over by him or her to the Trust if it is
ultimately determined that he or she is not entitled to indemnification under
this Article XI; provided, however, that (a) such agent shall have provided
appropriate security for such undertaking, (b) the Trust is insured against
losses arising out of any such advance payments or (c) either a majority of
the Trustees who are neither Interested Persons of
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<PAGE> 16
the Trust nor parties to the proceedings, or independent legal counsel in a
written opinion, shall have determined, based upon a review of readily available
facts (as opposed to a trial-type inquiry or full investigation), that there is
reason to believe that such agent will be found entitled to indemnification
under this Article XI.
Section 6. Fiduciaries of Employee Benefit Plan. The Article does not
apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1
of this Article. Nothing contained in this Article shall limit any right to
indemnification to which such Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE XII
Amendments
These By-Laws, or any of them, may be altered, amended or repealed, or
new By-laws may be adopted by (a) a vote of holders of the majority of the
outstanding Shares entitled to vote or (b) by the Trustees, provided,
however, that no By-law may be amended, adopted or repealed by the Trustees
if such amendment, adoption or repeal is required by applicable law, the
Declaration of Trust or these By-Laws, to be submitted to a vote of the
Shareholders.
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<PAGE> 1
Exhibit 5(a)
PRUDENTIAL DIVERSIFIED SERIES
Management Agreement
Agreement made this __th day of _______, 19__, between
Prudential Diversified Series (the Trust), and Prudential Investments Fund
Management LLC, a New York limited liability company (the Manager).
W I T N E S S E T H
WHEREAS, the Trust is a non-diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the 1940 Act);
WHEREAS, the shares of beneficial interest of the Trust are
divided into separate series or portfolios (each a Portfolio), each of which
is established pursuant to a resolution of the Trustees of the Trust, and the
Trustees may from time to time terminate such Portfolios or establish and
terminate additional Portfolios; and
WHEREAS, the Trust desires to retain the Manager to render or
contract to obtain as hereinafter provided investment advisory services to
the Trust and the Trust also desires to avail itself of the facilities
available to the Manager with respect to the administration of its day to day
corporate affairs, and the Manager is willing to render such investment
advisory and administrative services;
NOW, THEREFORE, the parties agree as follows:
1. The Trust hereby appoints the Manager to act as manager of the
Trust and administrator of its corporate affairs for the period and on the
terms set forth in this Agreement. The Manager accepts such appointment and
agrees to render the services
<PAGE> 2
herein described, for the compensation herein provided. The Manager is
authorized to enter into sub-advisory agreements for investment advisory
services in connection with the management of the Trust and each Portfolio
thereof. Any such agreement may be entered into by the Manager on such terms and
in such manner as may be permitted by the 1940 Act and the rules thereunder. The
Manager will continue to have responsibility for all investment advisory
services furnished pursuant to any such sub-advisory agreements. The Manager
will review the performance of all sub-advisers (each an Adviser), and make
recommendations to the Trustees of the Trust with respect to the retention and
renewal of contracts.
2. Subject to the supervision of the Board of Trustees of the Trust,
the Manager shall administer the Trust's corporate affairs and, in connection
therewith, shall furnish the Trust with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof, the Manager shall manage the investment operations of the
Trust and each Portfolio thereof and the composition of each Portfolio of the
Trust, including the purchase, retention and disposition thereof, in accordance
with each Portfolio's investment objectives, policies and restrictions as stated
in the Prospectus (hereinafter defined) and subject to the following
understandings:
(a) The Manager shall provide supervision of each Portfolio's
investments and determine from time to time what investments or
securities will be purchased, retained, sold or loaned by the Portfolio,
and what portion of its assets will be invested or held uninvested as
cash.
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<PAGE> 3
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus (hereinafter defined) of the Trust and
with the instructions and directions of the Board of Trustees of the
Trust and will conform to and comply with the requirements of the 1940
Act and all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures
contracts to be purchased or sold by each Portfolio and will place
orders pursuant to its determinations with or through such persons,
brokers, dealers or futures commission merchants (including but not
limited to Prudential Securities Incorporated, and brokers, dealers and
futures commissions merchants which are "affiliated persons" of an
Adviser) in conformity with the policy with respect to brokerage as set
forth in the Trust's Registration Statement and Prospectus (hereinafter
defined) or as the Board of Trustees may direct from time to time. In
providing the Trust with investment supervision, it is recognized that
the Manager will give primary consideration to securing the most
favorable price and efficient execution. Consistent with this policy,
the Manager may consider the financial responsibility, research and
investment information and other services provided by brokers, dealers
or futures commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager
or an Adviser may be a party. It is understood that Prudential
Securities Incorporated or a broker which is an "affiliated person" of
an Adviser may be used
3
<PAGE> 4
as principal broker for securities transactions but that no formula has
been adopted for allocation of the Trust's investment transaction business.
It is also understood that it is desirable for the Trust that the Manager
and each Adviser have access to supplemental investment and market research
and security and economic analysis provided by brokers or futures
commission merchants and that such brokers may execute brokerage
transactions at a higher cost to the Trust than may result when allocating
brokerage to other brokers or futures commission merchants on the basis of
seeking the most favorable price and efficient execution. Therefore, the
Manager and each Adviser is authorized to pay higher brokerage commissions
for the purchase and sale of securities and futures contracts for the Trust
to brokers or futures commission merchants who provide such research and
analysis, subject to review by the Trust's Board of Trustees from time to
time with respect to the extent and continuation of this practice. It is
understood that the services provided by such broker or futures commission
merchant may be useful to the Manager or an Adviser in connection with its
services to other clients.
On occasions when the Manager or an Adviser deems the purchase or
sale of a security or a futures contract to be in the best interest of
the Trust as well as other clients of the Manager or the Adviser, the
Manager or the Adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be so sold or purchased in order to
obtain the most favorable price or lower brokerage
4
<PAGE> 5
commissions and efficient execution. In such event, allocation of the
securities or futures contracts so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager or the
Adviser in the manner it considers to be the most equitable and consistent
with its fiduciary obligations to the Portfolio, the Trust and to such
other clients.
(d) The Manager shall maintain all books and records with respect
to the Trust's portfolio transactions and shall render to the Trust's
Board of Trustees such periodic and special reports as the Board may
reasonably request.
(e) The Manager shall be responsible for the financial and
accounting records to be maintained by the Trust (including those being
maintained by the Trust's Custodian).
(f) The Manager shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the Trust's assets.
(g) The investment management services of the Manager to the
Trust under this Agreement are not to be deemed exclusive, and the
Manager shall be free to render similar services to others.
3. The Trust has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Agreement and Declaration of Trust (such Agreement and
Declaration of Trust, as in effect on the date hereof and as amended
from time to time, is hereinafter called the "Declaration of Trust");
5
<PAGE> 6
(b) By-Laws of the Trust (such By-Laws, as in effect on the date
hereof and as amended from time to time, are hereinafter called the
"By-Laws");
(c) Certified resolutions of the Board of Trustees of the Trust
authorizing the appointment of the Manager and approving the form of
this agreement;
(d) Registration Statement under the 1940 Act and the Securities
Act of 1933, as amended, on Form N-1A (the Registration Statement), as
filed with the Securities and Exchange Commission (the Commission)
relating to the Trust and its shares of beneficial interest and all
amendments thereto;
(e) Notification of Registration of the Trust under the 1940 Act
on Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus and Statement of Additional Information of the
Trust (such Prospectus and Statement of Additional Information, as
currently in effect and as amended or supplemented from time to time,
being hereinafter called the "Prospectus").
4. The Manager shall authorize and permit any of its officers and
employees who may be elected as Trustees or officers of the Trust to serve in
the capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
officers or employees of the Manager.
5. The Manager shall keep the Trust's books and records required
to be maintained by it pursuant to paragraph 2 hereof. The Manager agrees
that all records which it maintains for the Trust are the property of the
Trust and it will surrender
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<PAGE> 7
promptly to the Trust any such records upon the Trust's request, provided
however that the Manager may retain a copy of such records. The Manager further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
any such records as are required to be maintained by the Manager pursuant to
Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Trust and
the Manager except the fees and expenses of Trustees who are not
affiliated persons of the Manager or of any Adviser,
(ii) all expenses incurred by the Manager or by the Trust in
connection with managing the ordinary course of the Trust's business
other than those assumed by the Trust herein, and
(iii) the costs and expenses payable to any Adviser pursuant to
any sub-advisory agreements.
The Trust assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Trust in connection
with the management of the investment and reinvestment of each
Portfolio's assets,
(b) the fees and expenses of Trustees who are not affiliated
persons of the Manager or the Trust's Advisers,
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Trust
and the providing of any
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<PAGE> 8
such records to the Manager useful to the Manager in connection with the
Manager's responsibility for the accounting records of the Trust pursuant
to Section 31 of the 1940 Act and the rules promulgated thereunder, (iii)
the pricing of the shares of the Trust, including the cost of any pricing
service or services which may be retained pursuant to the authorization of
the Board of Trustees of the Trust, and (iv) for both mail and wire orders,
the cashiering function in connection with the issuance and redemption of
the Trust's securities,
(d) the fees and expenses of the Trust's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Trust,
(f) brokers' commissions and any issue or transfer taxes
chargeable to the Trust in connection with its securities and futures
transactions,
(g) all taxes and corporate fees payable by the Trust to federal,
state or other governmental agencies,
(h) the fees of any trade associations of which the Trust may be
a member,
(i) the cost of share certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Trust,
(j) the cost of fidelity, trustees and officers and errors and
omissions insurance,
8
<PAGE> 9
(k) the fees and expenses involved in registering and maintaining
registration of the Trust and of its shares with the Commission,
registering the Trust as a broker or dealer and qualifying its shares
under state securities laws, including the preparation and printing of
the Trust's registration statements, prospectuses and statements of
additional information for filing under federal and state securities
laws for such purposes,
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the
Trust's business, and
(n) any expenses assumed by the Trust pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. For the services provided and the expenses assumed pursuant to
this Agreement, the Trust will pay to the Manager as full compensation
therefor a fee as set forth below. This fee will be computed daily and will
be paid to the Manager monthly. Any reduction in the fee payable shall be
made monthly. Any such reductions or payments are subject to readjustment
during the year.
<TABLE>
<CAPTION>
Rate as a percentage of
Name of Portfolio average daily net assets
- ----------------- ------------------------
<S> <C>
Conservative Growth Portfolio .75%
Moderate Growth Portfolio .75%
Aggressive Growth Portfolio .75%
</TABLE>
9
<PAGE> 10
8. The Manager shall not be liable for any error of judgment or
for any loss suffered by the Trust in connection with the matters to which
this Agreement relates, except a loss resulting from a breach of fiduciary
duty with respect to the receipt of compensation for services (in which case
any award of damages shall be limited to the period and the amount set forth
in Section 36(b)(3) of the 1940 Act) or loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or from reckless disregard by it of its obligations and duties
under this Agreement.
9. 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
with respect to any Portfolio by the Trust at any time, without the payment
of any penalty, by the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager at any time, without the payment of any
penalty, on not more than 60 days' nor less than 30 days' written notice to
the other party. This Agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act).
10. Nothing in this Agreement shall limit or restrict the right
of any officer or employee of the Manager who may also be a trustee, officer
or employee of the Trust to engage in any other business or to devote his or
her time and attention in part to the management or other aspects of any
business, whether of a similar or dissimilar
10
<PAGE> 11
nature, nor limit or restrict the right of the Manager to engage in any other
business or to render services of any kind to any other corporation, firm,
individual or association.
11. Except as otherwise provided herein or authorized by the
Board of Trustees of the Trust from time to time, the Manager shall for all
purposes herein be deemed to be an independent contractor and shall have no
authority to act for or represent the Trust in any way or otherwise be deemed
an agent of the Trust.
12. During the term of this Agreement, the Trust agrees to
furnish the Manager at its principal office all prospectuses, proxy
statements, reports to shareholders, sales literature, or other material
prepared for distribution to shareholders of the Trust or the public, which
refer in any way to the Manager, prior to use thereof and not to use such
material if the Manager reasonably objects in writing within five business
days (or such other time as may be mutually agreed) after receipt thereof. In
the event of termination of this Agreement, the Trust will continue to
furnish to the Manager copies of any of the above mentioned materials which
refer in any way to the Manager. Sales literature may be furnished to the
Manager hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery. The Trust shall furnish or otherwise make
available to the Manager such other information relating to the business
affairs of the Trust as the Manager at any time, or from time to time,
reasonably requests in order to discharge its obligations hereunder.
13. This Agreement may be amended by mutual consent, but the
consent of the Trust must be obtained in conformity with the requirements of
the 1940 Act.
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<PAGE> 12
14. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed
by registered mail, postage prepaid, (1) to the Manager at Gateway Center
Three, 100 Mulberry Street, Newark, NJ 07102-4077, Attention: Secretary; or
(2) to the Trust at Gateway Center Three, 100 Mulberry Street, Newark, NJ
07102-4077, Attention: President.
15. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
[16. The Trust may use the name "Prudential Diversified Series"
or any name including the word "Prudential" only for so long as this
Agreement or any extension, renewal or amendment hereof remains in effect,
including any similar agreement with any organization which shall have
succeeded to the Manager's business as Manager or any extension, renewal or
amendment thereof remain in effect. At such time as such an agreement shall
no longer be in effect, the Trust will (to the extent that it lawfully can)
cease to use such a name or any other name indicating that it is advised by,
managed by or otherwise connected with the Manager, or any organization which
shall have so succeeded to such businesses. In no event shall the Trust use
the name "Prudential Diversified Series" or any name including the word
"Prudential" if the Manager's function is transferred or assigned to a
company of which The Prudential Insurance Company of America does not have
control.]
17. The Trust is a business trust organized under the Delaware
Business Trust Act pursuant to a certificate of trust dated July 29, 1998.
The Trust is a series trust and all debts, liabilities, obligations and
expenses of a particular Portfolio shall be
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<PAGE> 13
enforceable only against the assets of that Portfolio and not against the assets
of any other Portfolio or of the Trust as a whole. This Agreement is executed by
Trustee or officer of the Trust in such capacity and not individually. Neither
the Trustees, officers, agent or shareholders of the Trust assume any personal
liability for obligations entered into on behalf of the Trust (or a Portfolio
thereof).
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 DIVERSIFIED SERIES
By:__________________________________
President
PRUDENTIAL INVESTMENTS TRUST
MANAGEMENT LLC
By:__________________________________
Robert F. Gunia
Executive Vice President
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<PAGE> 1
EXHIBIT 5(b)
PRUDENTIAL DIVERSIFIED SERIES
(_____________________ Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this _____ day of August, 1998, between Prudential
Investments Fund Management LLC (PIFM or the Manager), a New York limited
liability company, and ________________________ (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Series (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM will
act as manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust, and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
___________________ Portfolio of the Trust (the Portfolio) in connection with
the management of the Trust and to manage such portion of the Portfolio as the
Manager shall from time to time direct, and the Adviser is willing to render
such investment advisory services.
<PAGE> 2
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment
operations of the Portfolio as the Manager shall direct and shall
manage the composition of such portion of the Portfolio, including the
purchase, retention and disposition thereof, in accordance with the
Portfolio's investment objective, 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") as delivered to the
Adviser from time to time by the Manager and subject to the following
understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments and determine from time to time what
investments and securities will be purchased, retained, sold or loaned
by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus of the Trust and the
Portfolio as provided to the Adviser by the Manager and with the
written instructions and directions of the Manager and of the Trustees
of the Trust 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 Adviser shall determine the securities and
commodities or other assets to be purchased or sold by such portion of
the Portfolio and will place orders pursuant to its determination with
or through such persons, brokers, dealers or futures commission
merchants
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<PAGE> 3
(including but not limited to Prudential Securities Incorporated) to
carry out the policy with respect to brokerage as set forth in the
Trust's Registration Statement and Prospectus or as the Trustees may
direct from time to time. In providing the Portfolio with investment
supervision, it is recognized that the Adviser will give primary
consideration to securing best execution. Within the framework of this
policy, the Adviser may consider the financial responsibility, research
and investment information and other services provided by brokers,
dealers or futures commission merchants who may effect or be a party to
any such transaction or other transactions to which the Adviser'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
Portfolio's investment transaction business. It is also understood that
it is desirable for the Trust that the Adviser 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 Trust than may
result when allocating brokerage to other brokers on the basis of
seeking best execution. Therefore, the Adviser is authorized to place
orders for the purchase and sale of securities and commodities or other
assets for the Portfolio with such brokers or futures commission
merchants, subject to review by the Trustees 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 Adviser in connection with
the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security, commodity or other asset to be in the best interest of the
Portfolio as well as other clients of the Adviser,
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<PAGE> 4
the Adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities, commodities or other assets to be sold or purchased in
order to obtain best execution. In such event, allocation of the
securities, commodities or other assets so purchased or sold, as well
as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable
and consistent with its fiduciary obligations to the Trust and to such
other clients.
(iv) The Adviser shall maintain all books and records with
respect to the 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 Trustees such periodic and special
reports as the Board may reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the portion of the Portfolio's assets it manages and shall provide the
Manager with such information upon request of the Manager. The Adviser
shall reconcile its records of the Portfolio's securities and cash
managed by the Adviser with statements provided by the Custodian at
least once each month. The Adviser shall provide the Manager with a
written report on each such reconciliation, including information on
any discrepancies noted and actions taken by the Adviser in response
thereto, by the tenth business day of the following month.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to
render similar services to others.
(b) Services to be furnished by the Adviser under this
Agreement may be furnished through the medium of any of its directors, officers
or employees.
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<PAGE> 5
(c) The Adviser shall keep the Portfolio's books and records
required to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof
and shall timely furnish to the Manager all information relating to the
Adviser's services hereunder needed by the Manager to keep the other books and
records of the Trust required by Rule 31a-1 under the 1940 Act. The Adviser
agrees that all records which it maintains for the Portfolio are the property of
the Trust and the Adviser will surrender promptly to the Trust any of such
records upon the Trust's request. The Adviser further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance
procedures to ensure its compliance with the 1940 Act, the Investment Advisers
Act of 1940 (Advisers Act) and other applicable state and federal laws and
regulations.
(e) The Adviser shall furnish to the Manager copies of all
records prepared in connection with (i) the performance of this Agreement and
(ii) the reports prepared in accordance with the compliance procedures
maintained pursuant to paragraph 1(d) hereof as the Manager may reasonably
request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement at the annual
rate of ___ of 1% of the average daily net assets of the portion of the
Portfolio managed by the Adviser. This fee will be computed daily and
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<PAGE> 6
paid monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust 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 Adviser'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 Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser 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 Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or dissimilar nature, nor
limit the Adviser'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
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser
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<PAGE> 7
in any way; provided, however, that any such item which describes or
characterizes the Adviser's investment process with respect to the Portfolio,
the names of any of its clients (other than the Trust or advisory clients of
PIFM) or any of its performance results shall be furnished to the Adviser by
first class or overnight mail, facsimile transmission equipment or hand delivery
prior to use thereof, and such item shall not be used if the Adviser reasonably
objects to such use in writing within twenty-four (24) hours (or such other time
as may be mutually agreed) after receipt thereof (provided, however, that if
such item is not received by the Adviser during normal business hours on a
business day, such period shall end twenty-four (24) hours after the start of
normal business hours on the next succeeding business day).
8. This Agreement may be amended by mutual consent, but the consent of
the Trust 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.
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
----------------------------------
[ADVISER]
By
----------------------------------
7
<PAGE> 1
EXHIBIT 6
PRUDENTIAL DIVERSIFIED SERIES
Distribution Agreement
Agreement made as of _______, 1998, between Prudential
Diversified Series, a Delaware business trust (the Fund), and Prudential
Investment Management Services LLC, a Delaware limited liability company (the
Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the Investment Company Act), as a diversified,
open-end, management investment company and it is in the interest of the Fund to
offer its shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes
and/or series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares.
WHEREAS, the Distributor is a broker-dealer registered under
the Securities Exchange Act of 1934, as amended, and is engaged in the business
of selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other, with respect to the continuous offering of the Fund's
Shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of
distribution pursuant to Rule 12b-1 under the Investment Company Act with
respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares to the
public on behalf of the Fund and the Distributor hereby accepts such appointment
and agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell Shares of the Fund through the Distributor on the terms and
conditions set forth below.
<PAGE> 2
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the
Fund to act as principal underwriter and distributor of the Fund's Shares,
except that:
2.1 The exclusive rights granted to the Distributor to sell
Shares of the Fund shall not apply to Shares of the Fund issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of all
(or substantially all) the assets or the outstanding shares of any such company
by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Fund's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement filed by the
Fund with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund
on behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of
the Fund and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
3.3 The Fund shall have the right to suspend the sale of any
or all classes and/or series of its Shares at times when redemption is suspended
pursuant to
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<PAGE> 3
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing
by the Fund, shall be promptly advised of all purchase orders for Shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Shares. The Fund (or its agent)
will confirm orders upon their receipt, will make appropriate book entries and
upon receipt by the Fund (or its agent) of payment therefor, will deliver
deposit receipts for such Shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Shares
so tendered in accordance with its Declaration of Trust as amended from time to
time, and in accordance with the applicable provisions of the Prospectus. The
price to be paid to redeem or repurchase the Shares shall be equal to the net
asset value determined as set forth in the Prospectus. All payments by the Fund
hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption
price as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Shares
shall be paid by the Fund as follows: (i) in the case of Shares subject to a
contingent deferred sales charge, any applicable contingent deferred sales
charge shall be paid to the Distributor, and the balance shall be paid to or for
the account of the redeeming shareholder, in each case in accordance with
applicable provisions of the Prospectus; and (ii) in the case of all other
Shares, proceeds shall be paid to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of any class and/or series of Shares or payment
may be suspended at times when the New York Stock Exchange is closed for other
than customary weekends and holidays, when trading on said Exchange is
restricted, when an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange Commission, by order,
so permits.
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<PAGE> 4
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of Shares
as provided herein, the Fund agrees to sell its Shares so long as it has Shares
of the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states
as the Distributor and the Fund may approve of its intention to sell any
appropriate number of its Shares; provided that the Fund shall not be required
to amend its Declaration of Trust or By-Laws to comply with the laws of any
state, to maintain an office in any state, to change the terms of the offering
of its Shares in any state from the terms set forth in its Registration
Statement, to qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims arising out of
the offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such notifications.
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<PAGE> 5
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Shares, but shall not be obligated to sell any specific number
of Shares. Sales of the Shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers as
set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into
selected dealer agreements with registered and qualified securities dealers and
other financial institutions of its choice for the sale of Shares, provided that
the Fund shall approve the forms of such agreements. Within the United States,
the Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
7.1 With respect to classes and/or series of Shares which
impose a front-end sales charge, the Distributor shall receive and may retain
any portion of any front-end sales charge which is imposed on such sales and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Rule 2830 of the Conduct Rules of the NASD. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which
impose a contingent deferred sales charge, the Distributor shall receive and may
retain any contingent deferred sales charge which is imposed on such sales as
set forth in the Prospectus, subject to the limitations of Rule 2830 of the
Conduct Rules of the NASD.
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<PAGE> 6
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect,
the Distributor shall inform the Board of the commissions and account servicing
fees with respect to the relevant class and/or series of Shares to be paid by
the Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
Section 10. Indemnification
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<PAGE> 7
10.1 The Fund agrees to indemnify, defend and hold the
Distributor, its officers and directors and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any reasonable counsel fees incurred in connection therewith)
which the Distributor, its officers, members or any such controlling person may
incur under the Securities Act, or under common law or otherwise, arising out of
or based upon any untrue statement of a material fact contained in the
Registration Statement or Prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information furnished by
the Distributor to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to the benefit
of any such officer, member or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of trustees or trustees who are
neither "interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the
Fund, its officers and trustees and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and trustees or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its trustees or officers or such
controlling person resulting from such claims or demands
7
<PAGE> 8
shall arise out of or be based upon any alleged untrue statement of a material
fact contained in information furnished by the Distributor to the Fund for use
in the Registration Statement or Prospectus or shall arise out of or be based
upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus or
necessary to make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and trustees and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and trustees or
any such controlling person, such notification being given to the Distributor at
its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date
first above written and shall remain in force for two years from the date hereof
and thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those trustees who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of any of the
Fund's Plans or in any agreement related thereto (independent trustees), cast in
person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent trustees or by vote of
a majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when used
in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the independent
trustees cast in person at a meeting called for the purpose of voting on such
amendment.
8
<PAGE> 9
Section 13. Separate Agreement as to Classes and/or Series
The amendment or termination of this Agreement with respect to
any class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. Governing Law
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New Jersey as at the
time in effect and the applicable provisions of the Investment Company Act. To
the extent that the applicable law of the State of New Jersey, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
Prudential Investment Management Services LLC
By: ________________________
Prudential Diversified Series
By: ________________________
9
<PAGE> 1
Exhibit 8
FORM OF
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held by It..................................................-1-
2. Duties to the Custodian with Respect to Property of The Fund Held By the Custodian in the
United States..........................................................................................-2-
2.1 Holding Securities............................................................................-2-
2.2 Delivery of Securities........................................................................-2-
2.3 Registration of Securities....................................................................-6-
2.4 Bank Accounts.................................................................................-7-
2.5 Availability of Federal Funds.................................................................-7-
2.6 Collection of Income..........................................................................-8-
2.7 Payment of Fund Monies........................................................................-8-
2.8 Liability for Payment in Advance of Receipt of Securities Purchased..........................-11-
2.9 Appointment of Agents........................................................................-11-
2.10 Deposit of Securities in Securities Systems..................................................-11-
2.10A Fund Assets Held in the Custodian's Direct Paper System......................................-13-
2.11 Segregated Account...........................................................................-14-
2.12 Ownership Certificates for Tax Purposes......................................................-15-
2.13 Proxies......................................................................................-16-
2.14 Communications Relating to Fund Portfolio Securities.........................................-16-
2.15 Reports to Trust by Independent Public Accountants...........................................-16-
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States........-17-
3.1 Appointment of Foreign Sub-Custodians........................................................-17-
3.2 Assets to be Held............................................................................-17-
3.3 Foreign Securities Depositories..............................................................-18-
3.4 Segregation of Securities....................................................................-18-
3.5 Agreements with Foreign Banking Institutions.................................................-18-
3.6 Access of Independent Accountants of the Fund................................................-19-
3.7 Reports by Custodian.........................................................................-19-
3.9 Liability of Foreign Sub-Custodians..........................................................-20-
3.10 Liability of Custodian.......................................................................-21-
3.11 Reimbursements for Advances..................................................................-21-
3.12 Monitoring Responsibilities..................................................................-22-
3.13 Branches of U.S. Banks.......................................................................-22-
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund...............................-23-
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
5. Proper Instructions...................................................................................-24-
6. Actions Permitted without Express Authority...........................................................-24-
7. Evidence of Authority.................................................................................-25-
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net
Asset Value and Net Income............................................................................-26-
9. Records...............................................................................................-26-
10. Opinion of Fund's Independent Accountant..............................................................-27-
11. Compensation of Custodian.............................................................................-27-
12. Responsibility of Custodian...........................................................................-27-
13. Effective Period, Termination and Amendment...........................................................-29-
14. Successor Custodian...................................................................................-30-
15. Interpretive and Additional Provisions................................................................-32-
16. Massachusetts Law to Apply............................................................................-32-
17. Prior Contracts.......................................................................................-32-
18. The Parties...........................................................................................-32-
19. Limitation of Liability...............................................................................-33-
</TABLE>
-ii-
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian", and each Fund listed on Appendix A which evidences its agreement to
be bound hereby executing a copy of this Contract (each such Fund individually
hereinafter referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/ Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the
<PAGE> 5
United States, but only in accordance with an applicable vote by the Board of
Directors/ Trustees of the Fund, and provided that the Custodian shall have the
same responsibility or liability to the Fund on account of any actions or
omissions of any sub-custodian so employed as any such sub-custodian has to the
Custodian, provided that the Custodian agreement with any such domestic
sub-custodian shall impose on such sub-custodian responsibilities and
liabilities similar in nature and scope to those imposed by this Agreement with
respect to the functions to be performed by such sub-custodian. The Custodian
may employ as sub-custodians for the Fund's securities and other assets the
foreign banking institutions and foreign securities depositories designated in
Schedule "A" hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of The Fund Held By
the Custodian in the United States.
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property, to be held by it in
the United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of Treasury, collectively referred to herein
as "Securities System" and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
-2-
<PAGE> 6
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book-entry
system account ("Direct Paper System") only upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the parties, and
only in the following cases:
(1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
(3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
(4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for
-3-
<PAGE> 7
exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
(7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the 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 Custodian's own
negligence or willful misconduct;
(8) For exchange or conversation 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;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
(9) In the case of warrants, rights or similar 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; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
-4-
<PAGE> 8
(10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
(11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
(12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
-5-
<PAGE> 9
(13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
(14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
(15) For any other proper business purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth the
purpose for which such delivery is to be made, declaring such
purpose to be a proper business purpose, and naming the person
or persons to whom delivery of such securities
-6-
<PAGE> 10
shall be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominees of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless the
Fund has authorized in writing the appointment of a nominee to be used in common
with other registered investment companies having the same investment adviser as
the Fund, or in the name or nominee name of any agent appointed pursuant to
Section 2.9 or in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the Custodian on behalf of the
Fund under the terms of this Contract shall be in "street name" or other good
delivery form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its best efforts to
timely collect income due the Fund on such securities and to notify the Fund on
a best efforts basis of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund, in a bank account established and used in
accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held
by the Custodian for the Fund may be deposited by
-7-
<PAGE> 11
it to its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem necessary
or desirable; provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of 1940 and
that each such bank or trust company and the funds to be approved by vote of a
majority of the Board of Directors/Trustees of the Fund. Such funds shall be
deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the
Fund and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in the amount of
checks received in payment for Shares of the Trust which are deposited into the
Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other payments with respect to
bearer securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
-8-
<PAGE> 12
and shall collect interest when due on securities held hereunder. Income due the
Fund on securities loaned pursuant to the provisions of Section 2.2 (10) shall
be the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to which the Fund is properly
entitled.
2.7 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 monies of the Fund in the
following cases only:
(1) Upon the purchase of securities held domestically, options,
futures contracts or options on futures contracts for the
account of the Fund but only (a) against the delivery of such
securities, or evidence of title to such options, futures
contracts or options on futures contracts, to the Custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.10
hereof; (c) in the case
-9-
<PAGE> 13
of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section
2.10A; (d) in the case of repurchase agreements
entered into between the Fund and the Custodian, or
another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with
such securities or (ii) against delivery of the
receipt evidencing purchase by the Fund of securities
owned by the Custodian along with written evidence of
the agreement by the Custodian to repurchase such
securities from the Fund or (e) for transfer to a
time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker
and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
(2) In connection with conversion, exchange or surrender
of securities owned by the Fund as set forth in
Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued by
the Fund as set forth in Article 4 hereof;
(4) For the payment of any expense or liability incurred
by the Fund, including but not limited to the
following payments for the account of the Fund:
interest, taxes, management, accounting, transfer
-10-
<PAGE> 14
agent and legal fees, and operating expenses of the
Fund whether or not such expenses are to be in whole
or part capitalized or treated as deferred expenses;
(5) For the payment of any dividends declared pursuant to
the governing documents of the Fund;
(6) For payment of the amount of dividends received in
respect of securities sold short;
(7) For any other proper purpose, but only upon receipt
of, in addition to Proper Instructions, a certified
copy of a resolution of Board of Directors/Trustees
or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary
or an Assistant Secretary, 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 purpose, and naming the person or persons
to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of securities for the account of the Fund
is made by the Custodian in advance of receipt of the securities purchased in
the absence of specific written instructions from the Fund to so pay in advance,
the Custodian shall be absolutely liable to the Fund for such securities to the
same extent as if the securities had been received by the Custodian.
-11-
<PAGE> 15
2.9 Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940, as
amended, to act as a custodian, as its agent to carry out such of the provisions
of this Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the Custodian of
its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may keep domestic securities of the
Fund in a Securities System provided that such
securities are represented in an account ("Account")
of the Custodian in the Securities System which shall
not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise
for customers;
(2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a
Securities System shall identify by book-entry those
securities belonging to the Fund;
-12-
<PAGE> 16
(3) The Custodian shall pay for domestic securities
purchased for the account of the Fund upon (i)
receipt of advice from the Securities System that
such securities have been transferred to the Account,
and (ii.) the making of an entry on the records of
the Custodian to reflect such payment and transfer
for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of
the Fund upon (i) receipt of advice from the
Securities System that payment for such securities
has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of
the Fund. Copies of all advices from the Securities
System of transfers of domestic securities for the
account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request,
the Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in
the form of a written advice or notice and shall
furnish promptly to the Fund copies of daily
transaction sheets reflecting each day's transactions
in the Securities System for the account of the Fund.
(4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding
-13-
<PAGE> 17
securities deposited in the Securities System;
(5) The Custodian shall have received the initial or
annual certificate, as the case may be, required by
Article 13 hereof;
(6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the
Fund for any loss or damage to the Fund resulting
from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or
any such agent to enforce effectively such rights as
it may have against the Securities System; at the
election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with
respect to any claim against the Securities System or
any other person which the Custodian may have as a
consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any
such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of
Proper Instructions;
(2) The Custodian may keep securities of the Fund in the
Direct Paper System only if such securities are
represented in an account
-14-
<PAGE> 18
("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the
Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
(3) The records of the Custodian with respect to
securities of the Fund which are maintained in the
Direct Paper System shall identify by book-entry
those securities belonging to the Fund;
(4) The Custodian shall pay for securities purchased for
the account of the Fund upon the making of an entry
on the records of the Custodian to reflect such
payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon the making of
an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account
of the Fund;
(5) The Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund, in
the form of a written advice or notice, of Direct
Paper on the next business day following such
transfer and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the
account of the Fund;
(6) The Custodian shall provide the Fund with any report
on its system of internal accounting control as the
Fund may reasonably request from time to time;
-15-
<PAGE> 19
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions
of any agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash, government securities or liquid,
high-grade debt obligations in connection with options purchased, sold or
written by the Fund or commodity futures contracts or options thereon purchased
or sold by the Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in the case of
clause (iv), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Directors/Trustees or of the Executive
Committee signed by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, setting forth the purpose or
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<PAGE> 20
purposes of such segregated account and declaring such purposes to be proper
corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection with
transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to
the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund
all written information (including, without limitation, pendency of calls and
maturities of securities held domestically and expirations of rights in
connection therewith and notices of exercise of call and put options written by
the Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought and from the party
(or his agents) making the tender or exchange offer. If the Fund desires to
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<PAGE> 21
take action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three business
days prior to the date of which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian
shall provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures contracts
and options on futures contracts, including securities deposited and/or
maintained in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes
and instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the foreign
banking institutions and foreign securities depositories designated on Schedule
A hereto ("foreign sub-custodians"). Upon receipt of "Proper Instructions", as
defined in Section 5 of this Contract, together with a certified resolution of
the Fund's Board of Directors/Trustees, the Custodian and the Fund may agree to
amend Schedule A hereto from time to time
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<PAGE> 22
to designate additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper Instructions, the
Fund may instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the
Investment Company Act of 1940, and (b) cash and cash equivalents in such
amounts as the Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its
books as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the Custodian employs a
foreign banking institution shall require that such institution establish a
custody account for the Custodian on behalf of the Fund and physically segregate
in that account, securities and other assets of the Fund, and, in the event that
such institution deposits the Fund's
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<PAGE> 23
securities in a foreign securities depository, that it shall identify on its
books as belonging to the Custodian, as agent for the Fund, the securities so
deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth in
Exhibit I hereto and shall provide that (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) beneficial
ownership of the Fund's assets will be freely transferable without the payment
of money or value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund; (d) officers
of or auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with the Custodian.
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<PAGE> 24
3.7 Reports by Custodian. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of the securities
and other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers of
securities to or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of the Fund indicating, as to securities
acquired for the Fund, the identity of the entity having physical possession of
such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this
Section 3.8, the provision of Sections 2.2 and 2.7 of this Contract shall apply,
in their entirety to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the
contrary, settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefore (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee to the same
extent as set forth
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<PAGE> 25
in Section 2.3 of this Contract, and the Fund agrees to hold any such nominee
harmless from any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the Custodian and
each Fund from and against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the institution's performance of such
obligations. At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts
or omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless of
whether assets are maintained in the custody of a foreign banking institution, a
foreign securities depository or a branch of a U.S. bank as contemplated by
paragraph 3.13 hereof, 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 loss where the
sub-custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
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<PAGE> 26
responsibility to the Fund for any loss due to such delegation, except such loss
as may result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that the
Custodian or its nominees shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as any arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the Fund shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund assets to the
extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually
to the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In
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<PAGE> 27
addition, the Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial condition of a
foreign sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign sub-custodian
that there appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent thereof) or that
its shareholders' equity has declined below $200 million (in each case computed
in accordance with generally accepted U.S. accounting principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the
provisions of Article 3 shall not apply where the custody of the Fund assets are
maintained in a foreign branch of a banking institution which is a "bank" as
defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by paragraph 1 of this
Contract.
(b) Cash held for the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction of
the Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the
Fund.
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<PAGE> 28
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of Directors/Trustees of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of Shares who have delivered
to the Transfer Agent a request for redemption or repurchase of their Shares. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of the
Fund, the Custodian shall honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Fund to the holder of Shares,
when presented to the Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time between the Fund and the
Custodian.
The Custodian shall receive from the distributor for the Fund's Shares
or from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions.
Proper Instructions as used herein means a writing signed or initialed by
one or more person or persons as the officers of the Fund shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of
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<PAGE> 29
transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
It is understood and agreed that the Board of Directors/Directors/Trustees has
authorized (i) Prudential Mutual Fund Management Inc., as Manager of the Fund,
and (ii) The Prudential Investment Corporation (or Prudential-Bache Securities
Inc.), as Subadviser to the Fund, to deliver proper instructions with respect to
all matters for which proper instructions are required by this Article 5. The
Custodian may rely upon the certificate of an officer of the Manager or
Subadviser, as the case may be, with respect to the person or persons authorized
on behalf of the Manager and Subadviser, respectively, to sign, initial or give
proper instructions for the purpose of this Article 5. Proper Instructions may
include communications effected directly between electro-mechanical or
electronic devices provided that the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.11.
6. Actions Permitted without Express Authority.
The Custodian may in its discretion, without express authority from the
Fund:
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<PAGE> 30
(1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to the Fund;
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as otherwise
directed by the Board of Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors/ Trustees pursuant to the Articles of
Incorporation/Declaration of Fund as described in such vote, and such vote may
be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net
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Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors/Trustees of the Fund
to keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by
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<PAGE> 32
the Fund and held by the Custodian and shall, when requested to do so by the
Fund and for such compensation as shall be agreed upon between the Fund and the
Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case
of a closed end fund) and Form N-SAR or other periodic reports to the Securities
and Exchange Commission and with respect to any other requirements of such
Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise
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<PAGE> 33
of reasonable care in carrying out the provisions of this Contract but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the Fund) on
all matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice. Notwithstanding the foregoing, the
responsibility of the Custodian with respect to redemptions effected by check
shall be in accordance with a separate Agreement entered into between the
Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization by the Fund to
maintain custody or any securities or cash of the Fund in a foreign country
including, but not limited to, losses resulting from nationalization,
expropriation, currency restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a
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<PAGE> 34
prerequisite to requiring the Custodian to take such action, shall provide
indemnity to the Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the Fund
notice of its intention to dispose of assets identifying such assets and the
Fund shall have one business day from receipt of such notice to notify the
Custodian if the Fund wishes the Custodian to dispose of Fund assets of equal
value other than those identified in such notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10
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<PAGE> 35
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Directors/Trustees of the Fund has
approved the initial use of a particular Securities System and the receipt of an
annual certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the use by the Fund of the Direct Paper System; provided further,
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation/Declaration of Trust, and further, provided,
that the Fund may at any time by action of its Board of Directors/Trustees (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise
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<PAGE> 36
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance with such
vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the
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successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/ Declaration of Trust of the Fund. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
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<PAGE> 38
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a Massachusetts Business trust, references to Board of Directors
and Articles of Incorporation shall be deemed a reference to Board of
Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Trustees under a Declaration of Trust,
dated (see Appendix A) and all persons dealing with the Fund must look solely to
the property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
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<PAGE> 39
ATTEST STATE STREET BANK AND TRUST COMPANY
_________________________ By______________________________________
ATTEST
EACH OF THE FUNDS LISTED ON APPENDIX A
_________________________ By______________________________________
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<PAGE> 1
EXHIBIT 9
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL DIVERSIFIED SERIES
and
PRUDENTIAL MUTUAL FUND SERVICES LLC
<PAGE> 2
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent ...................1
Article 2 Fees and Expenses............................................5
Article 3 Representations and Warranties of PMFS.......................5
Article 4 Representations of Warranties of the Fund....................7
Article 5 Duty of Care and Indemnification.............................7
Article 6 Documents and Covenants of the Fund and PMFS................10
Article 7 Termination of Agreement....................................11
Article 8 Assignment..................................................12
Article 9 Affiliations................................................12
Article 10 Amendment...................................................13
Article 11 Applicable Law..............................................13
Article 12 Miscellaneous...............................................13
Article 13 Merger of Agreement.........................................15
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the th day of , 19 by and between
PRUDENTIAL DIVERSIFIED SERIES, a Delaware business trust having its principal
office and place of business at Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102 (the Fund), and PRUDENTIAL MUTUAL FUND SERVICES LLC, a
New Jersey limited liability corporation, having its principal office and place
of business at Raritan Plaza One, Edison, New Jersey 08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer
agent, dividend disbursing agent and shareholder servicing agent in connection
with certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of beneficial
interest of each series of the Trust, $.001 par value (Shares), dividend
disbursing agent and shareholder servicing agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Fund or any series thereof (Shareholders) and set out in the currently effective
prospectuses and statement of additional information (prospectus) of the Fund,
including without limitation any periodic investment plan or periodic withdrawal
program.
1.02 PMFS agrees that it will perform the following services:
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(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the custodian
of the Fund authorized pursuant to the Declaration of Trust of the Fund (the
Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it
by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund; (vii) Calculate any sales charges payable by a Shareholder
on purchases and/or redemptions of Shares of the Fund as such charges may be
reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant to
Rule 17Ad-10(e) under the Securities Exchange Act of 1934 (1934 Act) a record of
the
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total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding. When recording the issuance of Shares, PMFS shall have
no obligation to take cognizance of any Blue Sky laws relating to the issue or
sale of such Shares, which functions shall be the sole responsibility of the
Fund.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State or
other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky notice for each
State
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and (ii) verify the establishment of transactions for each State on the system
prior to activation and thereafter monitor the daily activity for each State.
The responsibility of PMFS for the Fund's registration status under the Blue Sky
or securities laws of any State or other jurisdiction is solely limited to the
initial establishment of transactions subject to Blue Sky compliance by the Fund
and the reporting of such transactions to the Fund as provided above and as
agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the Fund
agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS
for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
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2.03 The Fund agrees to pay all fees and reimbursable expenses within a
reasonable period of time following the mailing of the respective billing
notice. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to PMFS by the Fund upon
request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities and
Exchange Commission (SEC) as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a business trust duly organized and existing and in good
standing under the laws of Delaware.
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4.02 It is empowered under applicable laws and by its Declaration of
Trust and By-Laws to enter into and perform this Agreement.
4.03 All proceedings required by said Declaration of Trust and By-Laws
have been taken to authorize it to enter into and perform this Agreement.
4.04 It is an investment company registered or to be registered with
the SEC under the Investment Company Act of 1940, as amended (the 1940 Act).
4.05 A registration statement under the Securities Act of 1933 (the
1933 Act) is currently effective or is anticipated to become effective, and will
remain effective, and appropriate state securities law notice filings have been
made and will continue to be made, with respect to all Shares of the Fund being
offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund shall indemnify
and hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been
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prepared and/or maintained by the Fund or any other person or firm on behalf of
the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that notice of such Shares be filed in such
State or other jurisdiction or in violation of any stop order or other
determination or ruling by any federal agency or any State or other jurisdiction
with respect to the offer or sale of such Shares in such State or other
jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by PMFS as a result of PMFS' lack of good faith, negligence or
willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents
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provided to PMFS or its agents or subcontractors by machine readable input,
telex, CRT data entry or other similar means authorized by the Fund, and shall
not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. PMFS, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signature of the officers of the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any
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claim or make any compromise in any case in which the other party may be
required to indemnify it except with the other party's prior written consent.
Article 6 Documents and Covenants of the Trust and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Fund authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
(b) A certified copy of the Declaration of Trust and By-Laws of the
Fund and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;
(d) A specimen of the certificates for Shares of the Fund in the forms
approved by the Board of Trustees, with a certificate of the Secretary of the
Fund as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems
to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
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6.03 PMFS shall prepare and keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket
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expenses associated with the movement of records and other materials will be
borne by the Fund. Additionally, PMFS reserves the right to charge for any other
reasonable fees and expenses associated with such termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential Securities Incorporated (Prudential Securities), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
(Prudential), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential Securities or Prudential subsidiary or affiliate duly
registered as a broker-dealer and/or a transfer agent pursuant to the 1934 Act
or (vi) any other Prudential Securities or Prudential affiliate or subsidiary;
provided, however, that PMFS shall be as fully responsible to the Fund for the
acts and omissions of any agent or subcontractor as it is for its own acts and
omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or notice to the
Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other
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investment company registered with the SEC under the 1940 Act, including without
limitation any investment company whose adviser, administrator, sponsor or
principal underwriter is or may become affiliated with Prudential Securities
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.
9.02 It is understood and agreed that the trustees, officers,
employees, agents and Shareholders of the Fund, and the trustees, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as trustees, officers,
employees, agents, shareholders or otherwise, and that the trustees, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
trustees, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, trustees, employees, agents,
shareholders or otherwise.
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Trustees of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be
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furnished to PMFS an affidavit of loss or non-receipt by the holder of Shares
with respect to which a certificate has been lost or destroyed, supported by an
appropriate bond satisfactory to PMFS and the Fund issued by a surety company
satisfactory to PMFS, except that PMFS may accept an affidavit of loss and
indemnity agreement executed by the registered holder (or legal representative)
without surety in such form as PMFS deems appropriate indemnifying PMFS and the
Fund for the issuance of a replacement certificate, in cases where the alleged
loss is in the amount of $1,000 or less.
12.02 In the event that any check or other order for payment of money
on the account of any Shareholder or new investor is returned unpaid for any
reason, PMFS will (a) give prompt notification to the Fund's distributor
(Distributor) of such non-payment; and (b) take such other action, including
imposition of a reasonable processing or handling fee, as PMFS may, in its sole
discretion, deem appropriate or as the Fund and the Distributor may instruct
PMFS.
12.03 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to PMFS shall be sufficiently
given if addressed to that party and received by it at its office set forth
below or at such other place as it may from time to time designate in writing.
To the Fund:
Prudential Diversified Series
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Attention: President
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To PMFS:
Prudential Mutual Fund Services LLC
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
PRUDENTIAL DIVERSIFIED SERIES
By: ___________________________
Richard A. Redeker
President
PRUDENTIAL MUTUAL
FUND SERVICES LLC
By: ___________________________
Vincent Marra
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Schedule A
Prudential Mutual Fund Services LLC
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
General -- Fees are based on an annual per shareholder account charge for
account maintenance plus out-of-pocket expenses. In addition, there is a one
time set-up charge per account for manually established accounts and a monthly
charge for inactive zero balance accounts. The effective period of this fee
schedule is , 19 through , 19 and shall continue thereafter from
year to year, unless otherwise amended.
Annual Maintenance Charges -- The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Annual Maintenance Per Account Fee $9.00
Other Charges
New Account Set-up Fee for Manually $2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $.20
Out-of-Pocket Expenses -- out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment -- An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL DIVERSIFIED SERIES PRUDENTIAL MUTUAL FUND
SERVICES LLC
BY:_________________________________ BY:_________________________________
TITLE:______________________________ TITLE:______________________________
DATE:_______________________________ DATE:_______________________________
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[LETTERHEAD OF MORRIS, NICHOLS, ARSHT & TUNNELL]
EXHIBIT 10
August 4, 1998
Prudential Diversified Series
Three Gateway Center
Newark, New Jersey 07102-4077
Re: Prudential Diversified Series
Ladies and Gentlemen:
We have acted as special Delaware counsel to Prudential Diversified Series, a
Delaware business trust (the "Trust"), in connection with the creation of the
Trust and certain matters relating to the proposed issuance of Shares of the
Trust. Capitalized terms used herein and not otherwise herein defined are used
as defined in the Agreement and Declaration of Trust of the Trust dated July 29,
1998 (the "Governing Instrument").
In rendering this opinion, we have examined copies of the following documents,
each in the form provided to us: the Certificate of Trust of the Trust as filed
in the Office of the Secretary of State of the State of Delaware (the "State
Office") on July 29, 1998 (the "Certificate"); the Governing Instrument; the
By-laws of the Trust; a Unanimous Written Consent of the Board of Trustees of
the Trust dated July 29, 1998 (the "Consent"); the Notification of Registration
Filed Pursuant to Section 8(a) of the Investment Company Act of 1940 on Form
N-8A of the Trust to be filed with the Securities and Exchange Commission on or
about the date hereof; the Registration Statement on Form N-1A of the Trust to
be filed with the Securities and Exchange Commission on or about the date hereof
(the "Registration Statement" and, together with the Governing Instrument, the
By-laws of the Trust and the Consent, the "Operative Documents"); and a
certification of good standing of the Trust obtained as of a recent date from
the State Office. In such examinations, we have assumed the genuineness of all
signatures, the
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conformity to original documents of all documents submitted to us as copies or
drafts of documents to be executed, and the legal capacity of natural persons to
complete the execution of documents. We have further assumed for the purpose of
this opinion: (i) the due adoption, authorization, execution and delivery by,
or on behalf of, each of the parties thereto of the above-referenced
resolutions, instruments, certificates and other documents, and of all documents
contemplated by the Operative Documents to be executed by investors acquiring
Shares; (ii) the payment of consideration for Shares, and the application of
such consideration, as provided in the Operative Documents, and compliance with
the other terms, conditions and restrictions set forth in the Operative
Documents in connection with the issuance of Shares (including, without
limitation, the taking of all appropriate action by the Trustees to designate
Series of Shares and the rights and preferences attributable thereto as
contemplated by the Governing Instrument); (iii) that appropriate notation of
the names and addresses of, the number of Shares held by, and the consideration
paid by, Shareholders will be maintained in the appropriate registers and other
books and records of the Trust in connection with the issuance, redemption or
transfer of Shares; (iv) that no event has occurred subsequent to the filing of
the Certificate that would cause a termination or reorganization of the Trust
under Section 2 or Section 3 of Article VIII of the Governing Instrument; (v)
that the activities of the Trust have been and will be conducted in accordance
with the terms of the Governing Instrument and the Delaware Business Trust Act,
12 Del. C. sections 3801 et seq. (the "Delaware Act"); and (vi) that each of the
documents examined by us is in full force and effect and has not been amended,
supplemented or otherwise modified. No opinion is expressed herein with respect
to the requirements of, or compliance with, federal or state securities or blue
sky laws. Further, we have not participated in the preparation of the
Registration Statement or any other offering documentation relating to the
Trust or the Shares and we assume no responsibility for their contents. As to
any facts material to our opinion, other than those assumed, we have relied
without independent investigation on the above-referenced documents and on the
accuracy, as of the date hereof, of the matters therein contained.
Based on and subject to the foregoing, and limited in all respects to matters
of Delaware law, it is our opinion that:
1. The Trust is a duly created and validly existing business trust in good
standing under the laws of the State of Delaware.
2. The issuance of the Shares has been duly authorized on behalf of the Trust
and, when issued to Shareholders in
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accordance with the terms, conditions, requirements and procedures and for
the consideration set forth in the Operative Documents, will constitute
legally issued, fully paid and non-assessable Shares of beneficial interest
in the Trust
3. Under the Delaware Act and the terms of the Governing Instrument, each
Shareholder of the Trust, in such capacity, will be entitled to the same
limitation of personal liability as that extended to stockholders of
private corporations for profit organized under the general corporation law
of the State of Delaware; provided, however, that we express no opinion
with respect to the liability of any Shareholder who is, was or may become
a named Trustee of the Trust. Neither the existence nor exercise of the
voting rights granted to Shareholders under the Governing Instrument will,
of itself, cause a Shareholder to be deemed a trustee of the Trust under
the Delaware Act. Notwithstanding the foregoing or the opinion expressed in
paragraph 2 above, we note that, pursuant to Section 5 of Article IV of the
Governing Instrument, the Trustees have the power to cause Shareholders, or
Shareholders of a particular Series, to pay certain custodian, transfer,
servicing or similar agent charges by setting off the same against declared
but unpaid dividends or by reducing Share ownership (or by both means).
We hereby consent to the filing of a copy of this opinion with the
Securities and Exchange Commission with the Registration Statement. In
giving this consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder. Except as provided in this
paragraph, the opinion set forth above is expressed solely for the benefit
of the addressee hereof in connection with the matters contemplated hereby
and may not be relied upon for any other purpose or by any other person or
entity without our prior written consent.
Sincerely,
MORRIS, NICHOLS, ARSHT & TUNNEL
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EXHIBIT 15(a)
PRUDENTIAL DIVERSIFIED SERIES
Amended and Restated
Distribution and Service Plan
(Class A Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Diversified Series (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will employ the Distributor to distribute Class A shares issued by the
Fund (Class A shares). Under the Plan, the Fund intends to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class A shares.
A majority of the Board of Trustees of the Fund, including a majority
of those Trustees who are not "interested persons" of the Fund (as defined in
the Investment Company Act) and who have no direct or indirect financial
interest in the operation of this Plan or any agreements related to it (the Rule
12b-1 Trustees), have determined by votes cast in person at a meeting called for
the purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares
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of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class A shares of
the Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
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calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services
a distribution fee, together with the service fee (described in Section 2
hereof), of .30 of 1% per annum of the average daily net assets of the Class A
shares of the Fund for the performance of Distribution Activities. The Fund
shall calculate and accrue daily amounts payable by the Class A shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Trustees may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Trustees. The allocation of distribution expenses among classes will be
subject to the review of the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions and trailer commissions paid to, or on
account of, account executives of the Distributor;
3
<PAGE> 4
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A
shares of the Fund, including sales commissions, trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prudential Securities or Prusec) which have
entered into selected dealer agreements with the Distributor
with respect to Class A shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of
Trustees of the Fund for review, at least quarterly, a written report specifying
in reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as the
Board shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the
4
<PAGE> 5
Distributor and to broker-dealers and financial institutions which have selected
dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class A shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Trustees of the Fund and a majority of
the Rule 12b-1 Trustees by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Fund.
7. Amendments
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class A shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the Board
of Trustees of the Fund and a majority of
5
<PAGE> 6
the Rule 12b-1 Trustees by votes cast in person at a meeting called for the
purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated:_______________, 19
6
<PAGE> 1
EXHIBIT 15(b)
PRUDENTIAL DIVERSIFIED SERIES
Amended and Restated
Distribution and Service Plan
(Class B Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Diversified Series (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will employ the Distributor to distribute Class B shares issued by the
Fund (Class B shares). Under the Plan, the Fund wishes to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class B shares.
A majority of the Board of Trustees of the Fund, including a majority
who are not "interested persons" of the Fund (as defined in the Investment
Company Act) and who have no direct or indirect financial interest in the
operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares
1
<PAGE> 2
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class B shares of
the Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
2
<PAGE> 3
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Trustees may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Board of Trustees. Payments hereunder will be applied to
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on
3
<PAGE> 4
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class B shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class B shares
of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of
Trustees of the Fund for review, at least quarterly, a written report specifying
in reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as they
shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Trustees of the Fund of the
commissions
4
<PAGE> 5
and account servicing fees to be paid by the Distributor to account executives
of the Distributor and to broker-dealers and other financial institutions which
have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class B shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Trustees of the Fund and a majority of
the Rule 12b-1 Trustees by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Fund.
7. Amendments
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Fund. All material amendments
5
<PAGE> 6
of the Plan shall be approved by a majority of the Board of Trustees of the Fund
and a majority of the Rule 12b-1 Trustees by votes cast in person at a meeting
called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors/Trustees
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated:_______________, 19
6
<PAGE> 1
EXHIBIT 15(c)
PRUDENTIAL DIVERSIFIED SERIES
Distribution and Service Plan
(Class C Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Diversified Series (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will employ the Distributor to distribute Class C shares issued by the
Fund (Class C shares). Under the Plan, the Fund wishes to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class C shares.
A majority of the Board of Trustees of the Fund, including a majority
who are not "interested persons" of the Fund (as defined in the Investment
Company Act) and who have no direct or indirect financial interest in the
operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under
1
<PAGE> 2
the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class C shares of
the Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund
2
<PAGE> 3
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Trustees may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Board of Trustees. Payments hereunder will be applied to
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
3
<PAGE> 4
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of
Trustees of the Fund for review, at least quarterly, a written report specifying
in reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as they
shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the
4
<PAGE> 5
Distributor and to broker-dealers and other financial institutions which have
selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class C shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Trustees of the Fund and a majority of
the Rule 12b-1 Trustees by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Fund.
7. Amendments
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Fund. All material amendments of the Plan shall be approved by a majority of
the Board of Trustees of the Fund and a
5
<PAGE> 6
of the Plan shall be approved by a majority of the Board of Trustees of the Fund
and a majority of the Rule 12b-1 Trustees by votes cast in person at a meeting
called for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated:_______________, 19
6
<PAGE> 1
EXHIBIT 18
PRUDENTIAL DIVERSIFIED SERIES
(the Fund)
PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in each investment
portfolio (each a Portfolio). Any material amendment to this plan is subject to
prior approval of the Board of Trustees, including a majority of the independent
Trustees.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge and
a distribution and/or service fee pursuant to Rule
12b-1 under the 1940 Act (Rule 12b-1 fee) not to
exceed .30 of 1% per annum of the average daily net
assets of the class. The initial sales charge is
waived or reduced for certain eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge but
are subject to a high contingent deferred sales
charge (declining from 5% to zero over a six-year
period) which will be imposed on certain redemptions
and a Rule 12b-1 fee not to exceed 1% per annum of
the average daily net assets of the class. The
contingent deferred sales charge is waived for
certain eligible investors. Class B shares
automatically convert to Class A shares approximately
seven years after purchase.
CLASS C SHARES: Class C shares are subject to a low initial sales charge and a
1% contingent deferred sales charge which will be
imposed on certain redemptions within the first 18
months after purchase and a Rule 12b-1 fee not to
exceed 1% per annum of the average daily net assets
of the class.
Class Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge, nor are they
subject to any Rule 12b-1 fee.
<PAGE> 2
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class of a Portfolio will be
allocated to each class of such Portfolio on the basis of the net asset
value of that class in relation to the net asset value of the
Portfolio.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by each Portfolio to each class
of shares, to the extent paid, will be paid on the same day and at the
same time, and will be determined in the same manner and will be in the
same amount, except that the amount of the dividends and other
distributions declared and paid by a particular class of the Portfolio
may be different from that paid by another class of the Portfolio
because of Rule 12b-1 fees and other expenses borne exclusively by that
class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund's
current prospectus. Exchange privileges may vary among classes and
among holders of a Class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. Conversions
will be effected at relative net asset value without the imposition of
any additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and
shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the
interests of any other class.
B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities
2
<PAGE> 3
under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts among the interests of its several
classes. The Trustees, including a majority of the independent
Trustees, shall take such action as is reasonably necessary to
eliminate any such conflicts that may develop. Prudential Investments
Fund Management LLC, the Fund's Manager, will be responsible for
reporting any potential or existing conflicts to the Trustees.
C. For purposes of expressing an opinion on the financial statements of
each Portfolio of the Fund, the methodology and procedures for
calculating the net asset value and dividends/distributions of the
Fund's several classes and the proper allocation of income and expenses
among such classes will be examined annually by the Fund's independent
auditors who, in performing such examination, shall consider the
factors set forth in the relevant auditing standards adopted, from time
to time, by the American Institute of Certified Public Accountants.
Dated:_______________, 1988
3
