<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1998
SECURITIES ACT REGISTRATION NOS. 333-60561
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. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
PRUDENTIAL DIVERSIFIED FUNDS
(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
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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
Funds; Description of the Funds;
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............................ Financial Statements
</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 FUNDS(SM)
Prospectus dated October 1, 1998
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The Prudential Diversified Funds(SM) (the "Trust"), is an open-end,
management investment company currently composed of three diversified investment
portfolios (the "Funds") with the following investment objectives:
- PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH FUND seeks to provide current
income and a reasonable level of capital appreciation.
- PRUDENTIAL DIVERSIFIED MODERATE GROWTH FUND seeks to provide capital
appreciation and a reasonable level of current income.
- PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND seeks to provide long-term
capital appreciation.
Prudential Investments Fund Management LLP ("PIFM" or the "Manager") is
responsible for the overall management of the Funds. Each Fund benefits from
discretionary advisory services provided by several highly regarded sub-advisers
(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.
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Investors are advised to read this Prospectus and retain it for future
reference.
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AN INVESTMENT IN THE TRUST IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
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
FUND 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 FUNDS?
Prudential Diversified Funds is an open-end management investment company
offering shares in three diversified mutual funds (the "Funds"). 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 FUNDS' INVESTMENT OBJECTIVES?
The Funds' investment objectives are as follows:
PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH FUND (THE "CONSERVATIVE GROWTH
FUND") SEEKS TO PROVIDE CURRENT INCOME AND A REASONABLE LEVEL OF CAPITAL
APPRECIATION. The Fund pursues its objective by investing in a diversified
portfolio of debt obligations and equity securities.
PRUDENTIAL DIVERSIFIED MODERATE GROWTH FUND (THE "MODERATE GROWTH FUND")
SEEKS TO PROVIDE CAPITAL APPRECIATION AND A REASONABLE LEVEL OF CURRENT
INCOME. The Fund pursues its objective by investing in a diversified portfolio
of equity securities and debt obligations.
PRUDENTIAL DIVERSIFIED HIGH GROWTH FUND (THE "HIGH GROWTH FUND") SEEKS TO
PROVIDE LONG-TERM CAPITAL APPRECIATION. The Fund pursues its objective by
investing in a diversified portfolio of equity securities.
Each Fund includes a mix of asset classes and investment styles consistent
with the objectives, investment horizon and risk tolerance of a particular type
of investor. See "Introducing Prudential Diversified Funds -- What Are the
Differences Between the Funds?"
WHO MANAGES THE FUNDS?
Prudential Investments Fund Management LLC ("PIFM" or the "Manager") is the
Manager of each Fund and is compensated for its services at the annual rate of
.75% of the average daily net assets of each Fund.
PIFM has contracted with several highly regarded sub-advisers (the
"Advisers") to manage the assets of each Fund. 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 FUNDS' RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Conservative Growth and Moderate Growth Funds 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 Fund 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 Funds may invest
in debt securities of foreign issuers, and each of the
2
<PAGE> 5
Conservative Growth, Moderate Growth and High Growth Funds 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 are
generally greater with respect to the securities of issuers in emerging market
countries. See "Risk Factors" below. As with an investment in any mutual fund,
an investment in a Fund 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 Fund'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 Fund's outstanding Class A shares and is paid a
distribution and service fee with respect to each Fund's Class B and Class C
shares at the annual rate of 1% of the average daily net assets of each Fund'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 Investment 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 Funds 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 at
the time of purchase, on a deferred basis, or both. Class A shares are sold with
a front-end sales charge. Class B shares are subject to a contingent-deferred
sales charge. Class C shares are sold with a low front-end sales charge, but are
also subject to a contingent-deferred sales charge. 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 Fund:
<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 Fund expects to pay dividends of net investment income, if any, as
follows:
<TABLE>
<CAPTION>
FUND DIVIDENDS DECLARED AND PAID
- ---------------------------- ----------------------------
<S> <C>
Conservative Growth......... Quarterly
Moderate Growth............. Semi-Annually
High Growth................. Annually
</TABLE>
In addition, each Fund will make distributions of any net capital gains at least
annually. Dividends and distributions will be automatically reinvested in
additional shares of a Fund 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 FUND
<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................... .38% .38% .38% .38%
------------ ----- ----- ----------
Total Fund Operating Expenses.... 1.38%++ 2.13% 2.13% 1.13%
------------ ----- ----- ----------
------------ ----- ----- ----------
</TABLE>
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* 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 Fund
may not exceed 6.25% of total gross sales, subject to certain exclusions.
This 6.25% limitation is imposed on the Fund rather than on a per shareholder
basis. Therefore, long-term Class B and Class C shareholders of the Fund 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 Fund 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 and
service fees with respect to Class A shares of the Fund for the remainder of
the current fiscal year 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
1.43%.
5
<PAGE> 8
MODERATE GROWTH FUND
<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..................... .50% .50% .50% .50%
------------ ----- ----- ----------
Total Fund Operating Expenses...... 1.50%++ 2.25% 2.25% 1.25%
------------ ----- ----- ----------
------------ ----- ----- ----------
</TABLE>
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* 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 Fund
may not exceed 6.25% of total gross sales, subject to certain exclusions.
This 6.25% limitation is imposed on the Fund rather than on a per shareholder
basis. Therefore, long-term Class B and Class C shareholders of the Fund 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 Fund 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 and
service fees with respect to Class A shares of the Fund for the remainder of
the current fiscal year 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
1.55%.
6
<PAGE> 9
HIGH GROWTH FUND
<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..................... .44% .44% .44% .44%
------------ ----- ----- ----------
Total Fund Operating Expenses...... 1.44% 2.19% 2.19% 1.19%
---------- ----- ----- ----------
---------- ----- ----- ----------
</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 Fund
may not exceed 6.25% of total gross sales, subject to certain exclusions.
This 6.25% limitation is imposed on the Fund rather than on a per shareholder
basis. Therefore, long-term Class B and Class C shareholders of the Fund 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 Fund 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 and
service fees with respect to Class A shares of the Fund for the remainder of
the current fiscal year 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
1.49%.
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 Fund
Class A................................................... $63 $ 92
Class B (Redemption)...................................... $72 $ 97
Class B (No Redemption)................................... $22 $ 67
Class C (Redemption)...................................... $41 $ 76
Class C (No Redemption)................................... $31 $ 76
Class Z................................................... $12 $ 36
Moderate Growth Fund
Class A................................................... $64 $ 95
Class B (Redemption)...................................... $73 $100
Class B (No Redemption)................................... $23 $ 70
Class C (Redemption)...................................... $43 $ 80
Class C (No Redemption)................................... $33 $ 80
Class Z................................................... $13 $ 40
High Growth Fund
Class A................................................... $64 $ 93
Class B (Redemption)...................................... $72 $ 99
Class B (No Redemption)................................... $22 $ 69
Class C (Redemption)...................................... $42 $ 78
Class C (No Redemption)................................... $32 $ 78
Class Z................................................... $12 $ 38
</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
Funds 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 FUNDS
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 Funds is designed for investors who want investment
professionals to make their asset allocation decisions. The Trust offers three
Funds 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 Fund 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 Fund 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 FUNDS?
Each Fund has a distinct investment objective and is situated differently
along the risk/return spectrum.
[RISK/RETURN GRAPH]
- ---------------
1Source: 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 Fund depends upon the proportion of assets
it allocates to different types of investments.
PIMF has developed an asset allocation strategy for the Funds 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 FUND may be appropriate for investors who are seeking
current income and low to moderate capital appreciation. Investors in this Fund
should have both sufficient time and tolerance for risk of investment volatility
to accept periodic declines. The Fund is generally appropriate for investors
with a reasonably long time horizon (e.g., investors who are investing during
early retirement).
MODERATE GROWTH FUND may be appropriate for investors who are seeking
capital appreciation, but who are not willing to take the substantial market
risks associated with the High Growth Fund. Investors in this Fund should have
both the time and the tolerance for investment volatility to accept possible
large declines. The Fund 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).
HIGH GROWTH FUND may be appropriate for investors seeking to maximize the
potential for capital appreciation. Investors in this Fund should have both the
time and tolerance for investment volatility to accept substantial declines. The
Fund 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 Funds, depending on his or her
financial situation, personal investment objectives, investment horizon and
level of risk tolerance.
HOW ARE THE FUNDS MANAGED?
The Manager has contracted with several highly regarded sub-advisers (the
"Advisers") to manage the assets of each Fund. Each Adviser manages a portion of
a Fund's assets, focusing on a particular type and style of investing. The
Manager monitors the performance of each Fund's Advisers and allocates the
Fund's assets among its Advisers.
The Manager believes that its asset allocation strategy and multi-Adviser
approach will enhance the performance of the Funds 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 Fund segment in a particular type and style of investing, the Manager
believes that the combined efforts of several Advisers will result in prudently
diversified Funds. 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 Fund among a variety of
investment types and styles will reduce volatility.
10
<PAGE> 13
DESCRIPTION OF THE FUNDS
INVESTMENT OBJECTIVES AND POLICIES
Set forth below is a description of the investment objective and policies
of each Fund. Except for certain investment restrictions described in the
Statement of Additional Information, the investment objective and policies of
each Fund may be modified by the Board of Trustees. There can be no assurance
that a Fund will achieve its investment objective. As with an investment in any
mutual fund, an investment in a Fund can decrease in value and you can lose
money. Further information about the investment policies of each Fund appears in
the Statement of Additional Information.
CONSERVATIVE GROWTH FUND
The Conservative Growth Fund's investment objective is to seek to provide
current income and a reasonable level of capital appreciation. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
fixed income and equity securities. The table below identifies the Fund's
Advisers and their respective Fund segments.
<TABLE>
<CAPTION>
INITIAL ALLOCATION
OF FUND'S
ADVISER ASSETS ASSET CLASS INVESTMENT TYPE/STYLE
- ------- ------------------ ----------- ---------------------
<S> <C> <C> <C>
Jennison Associates LLC 15%
Equities Growth-oriented, focusing on
large-cap stocks
The Prudential Investment 15%
Corporation
Equities Value-oriented, focusing on
large-cap stocks
Franklin Advisers, Inc. 5%
Equities Growth-oriented, focusing on
small-cap and mid-cap stocks
The Dreyfus Corporation 5%
Equities Value-oriented, focusing on
small-cap and mid-cap stocks
Pacific Investment Management 40%
Company
Fixed Mostly high-quality debt
Income instruments
The Prudential Investment 20%
Corporation
Fixed High yield debt, including junk
Income bonds and emerging market debt
</TABLE>
In response to market developments, the Manager may rebalance 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 Fund'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 Fund 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 governments and
corporations, obligations of quasi-governmental entities, commercial paper,
certificates of deposit, money market instruments and loan participations.
11
<PAGE> 14
The Fund 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 Fund'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 Fund 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 but rated at least B by Moody's or S&P or the equivalent by another NRSRO,
or determined by the Adviser to be of comparable quality. 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. A description
of corporate bond ratings is contained in Appendix I to the Statement of
Additional Information. 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 Fund 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 Fund's total
assets will be invested in equity securities issued by U.S. and foreign
companies. The Fund's equity investments may include common stock, securities
convertible into common stock and preferred stock. The Fund may invest up to 15%
of its total assets in equity securities issued by foreign companies, including
companies based in emerging markets.
The Fund 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 Fund 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 Fund.
GDRs are generally issued by foreign banks and evidence ownership of either
foreign or domestic securities. The Fund 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 Fund 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
12
<PAGE> 15
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 Fund 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 Fund 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 Fund'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 Fund assets invested in certain securities or other instruments
resulting from market fluctuations or other changes in the Fund's total assets
will not require the Fund 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 Fund. 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 FUND
The Moderate Growth Fund's investment objective is to seek to provide
capital appreciation and a reasonable level of current income. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
equity and fixed income securities. The table below identifies the Fund's
Advisers and their respective Fund segments.
<TABLE>
<CAPTION>
INITIAL ALLOCATION
OF FUND'S
ADVISER ASSETS ASSET CLASS INVESTMENT TYPE/STYLE
- ------- ------------------ ----------- ---------------------
<S> <C> <C> <C>
Jennison Associates LLC 20%
Equities Growth-oriented, focusing on
large-cap stocks
The Prudential Investment 20%
Corporation
Equities Value-oriented, focusing on
large-cap stocks
Franklin Advisors, Inc. 7.5%
Equities Growth-oriented, focusing on
small-cap and mid-cap stocks
The Dreyfus Corporation 7.5%
Equities Value-oriented, focusing on
small-cap and mid-cap stocks
Lazard Asset Management 10%
International Stocks of foreign companies
Equities
Pacific Investment Management 20%
Company
Fixed Income Mostly high-quality debt
instruments
The Prudential Investment 15%
Corporation
Fixed Income High yield debt, including
junk bonds and emerging
markets debt
</TABLE>
In response to market developments, the Manager may rebalance the allocation of
the Fund's assets among the portfolio segments identified above, or may add or
eliminate portfolio segments in accordance with the Fund's investment objective
and the policies described below.
Under normal market conditions, approximately 65% of the Fund's total
assets will be invested in equity securities of U.S. and foreign companies. The
Fund's equity investments may include common stock, securities convertible into
common stock and preferred stock. The Fund may invest up to 25% of its total
assets in equity securities issued by foreign companies, including companies
based in emerging markets.
The Fund 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 Fund 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 Fund.
GDRs are generally issued by foreign banks and evidence ownership of either
foreign or domestic securities. The Fund 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.
Under normal market conditions, approximately 35% of the Fund's total
assets will be invested in fixed income securities of varying maturities with a
dollar-weighted average maturity of between
14
<PAGE> 17
[four] and [fifteen] years. The fixed income securities in which the Fund 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 Fund 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 Fund'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 Fund 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 but rated at least B by
Moody's or S&P or the equivalent by another NRSRO, or determined by the Adviser
to be of comparable quality. 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. A description of corporate bond ratings is
contained in Appendix I to the Statement of Additional Information. See "Risk
Factors" below.
The Fund 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 Fund 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 Fund 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 Fund 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 Fund'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 Fund assets invested in certain securities or other instruments
resulting from market fluctuations or other changes in the Fund's total assets
will not require the Fund 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 Fund. 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.
HIGH GROWTH FUND
The High Growth Fund's investment objective is to seek to provide long-term
capital appreciation. The Fund 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
Fund's assets will be invested in equity securities, including common stock,
securities convertible into common stock and preferred stock. The Fund may
invest up to 35% of its total assets in the equity securities of foreign
companies, including companies based in emerging markets. The table below
identifies the Fund's Advisers and their respective Fund segments.
<TABLE>
<CAPTION>
INITIAL ALLOCATION
OF FUND'S
ADVISER ASSETS ASSET CLASS INVESTMENT TYPE/STYLE
------- ------------------ ----------- ---------------------
<S> <C> <C> <C>
Jennison Associates LLC 25%
Equities Growth-oriented, focusing on
large-cap stocks
The Prudential Investment 25%
Corporation
Equities Value-oriented, focusing on
large-cap stocks
Franklin Advisers, Inc. 15%
Equities Growth-oriented, focusing on
small-cap and mid-cap stocks
The Dreyfus Corporation 15%
Equities Value-oriented, focusing on
small-cap and mid-cap stocks
Lazard Asset Management 20%
International Stocks of foreign companies
Equities
</TABLE>
In response to market developments, the Manager may rebalance the allocation of
the Fund's assets among the portfolio segments identified above, or may add or
eliminate portfolio segments in accordance with the Fund's investment objective
and the policies described below.
The Fund 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 Fund 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 Fund.
GDRs are generally issued by foreign banks and evidence ownership of either
foreign or domestic securities. The Fund may also invest in European
16
<PAGE> 19
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 Fund 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 Fund 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 Fund 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 Fund's investments are generally
measured at the time a transaction is entered into. Any subsequent change in the
percentage of Fund assets invested in certain securities or other instruments
resulting from market fluctuations or other changes in the Fund's total assets
will not require the Fund 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 Fund.
INTRODUCING THE ADVISERS
In addition to diversifying your investment across various asset classes,
the Trust provides investors with diversification among the Advisers'
distinctive investment styles.
JENNISON ASSOCIATES LLC (Large-Cap Growth Equity Adviser). Jennison seeks
to select attractive growth companies. Under normal market conditions, Jennison
intends to invest assets allocated to it primarily in equity securities of
companies that exceed $1 billion in market capitalization. Companies with market
capitalizations in excess of $1 billion are generally considered medium to large
capitalization companies. The Jennison portfolio managers' challenge is to
select about 60 stocks that are believed to have the potential to be the best
performers among the larger universe of growth stocks. Consequently, a growth
stock portfolio managed by Jennison normally consists of companies that the firm
believes will experience superior earnings growth over the next 12 to 18 months,
on both an absolute and relative basis, and which appear reasonably valued
relative to growth expectations. Jennison looks for companies that have
demonstrated growth in earnings and sales, high returns on equity and assets, or
other strong financial characteristics and, in the judgment of Jennison, are
attractively valued. These companies tend to have a unique market niche, a
strong new product profile or superior management. Stocks will be selected on a
company-by-company basis through the use of fundamental analysis. Of course,
there can be no assurance that these stocks will achieve their growth potential.
17
<PAGE> 20
THE PRUDENTIAL INVESTMENT CORPORATION (Large-Cap Value Equity Adviser).
Prudential Investment Corporation seeks to achieve long-term growth of capital
by investing primarily in larger-capitalization common stocks of major,
established corporations. These companies are believed to be in sound financial
condition and have prospects of price appreciation greater than broadly-based
stock indices. Value investing is a disciplined approach which attempts to
identify strong companies selling at a discount from their perceived true worth.
Management uses a "deep value" investment style to buy stocks which are believed
to be under-valued when compared with the company's sales, earnings, book value
and cash flow.
THE PRUDENTIAL INVESTMENT CORPORATION (High Yield Bond Adviser). Prudential
Investment Corporation seeks to maximize current income by investing in a
diversified portfolio of high yield fixed income securities. Capital
appreciation is a secondary investment objective. In seeking these objectives,
management will invest primarily in high yield fixed income securities rated
BBB/Baa by a NRSRO. Ordinarily, management will not invest in securities rated
below B. Prudential's High Yield team, supported by a group of sophisticated
research analysts, screens all bonds for positive sales, earnings trends, strong
management and the potential for a credit rating upgrade. Intensive research and
diversification help to reduce risk.
FRANKLIN ADVISERS, INC. (Small- and Mid-Cap Growth Equity Adviser).
Franklin Advisers, Inc. ("Franklin") seeks to achieve long-term capital growth
by investing primarily in stocks of small- and mid-cap companies that Franklin
believes to be positioned for rapid growth. Franklin employs a disciplined,
bottom-up approach to investing, focusing on companies that it believes to have
potential to rapidly grow revenues, earnings or cash flow. Although Franklin may
discover many of these companies in growing industries, its strategy emphasizes
companies with sustainable competitive advantages, such as unique products or
proprietary technology, which may provide these companies with growth
opportunities regardless of the growth outlook of the industry. In addition,
Franklin generally looks for companies that are selling at earnings multiples,
which represent significant discounts to their sustainable growth rates.
THE DREYFUS CORPORATION (Small- and Mid-Cap Value Equity Adviser). Dreyfus
utilizes computer techniques to construct and track its Fund segments. Dreyfus
employs statistical models designed to identify stocks of companies that are
undervalued and should be purchased and retained. Undervalued securities are
normally characterized by relatively low price to earnings ratios, low ratios of
market price to book value, or underlying asset values that Dreyfus feels are
not fully reflected in the securities' current market price. The models analyze
how a stock is priced relative to both its current and longer-term intrinsic
worth. In each economic sector, Dreyfus identifies stocks that have the best
relative undervaluation. Through this extensive quantitative system, each stock
is then ranked according to its relative attractiveness. Once undervalued common
stocks are identified, Dreyfus' experienced investment analysts construct each
Fund segment so that, in the aggregate, it resembles the Russell 2000 Value
Index, but is weighted toward the stocks that Dreyfus deems most attractive.
LAZARD ASSET MANAGEMENT (International Equity Adviser). Lazard seeks
capital appreciation by investing in financially productive non-U.S. companies
which sell at a discount to local and world market valuations. In searching for
undervalued securities, Lazard utilizes a stock selection process incorporating
three levels of investment research. First, Lazard applies screening techniques
to identify attractive candidates from a universe of approximately 9,000
companies worldwide. Lazard
18
<PAGE> 21
looks for companies offering a high return on capital with characteristics that
indicate undervaluation versus local and world indices. Next, intensive
accounting validation follows to examine whether a company's stated financial
statistics and business value are real. Finally, fundamental analysis is applied
in order to evaluate the future outlook for the company. An in-depth analysis,
including on-site visits to company management, is critical in order to ensure
the sustainability of returns, to discover hidden value and to identify a
catalyst for price revaluation. By team consensus, the securities presenting the
best investment opportunities are purchased.
A distinctive characteristic of Lazard's investment approach is its belief
in teamwork. The portfolio managers and research analysts work closely together
and meet frequently in the decision-making process. Ideas are internally
generated and Lazard's exhaustive in-house research process allows the team to
develop strong convictions in their decisions. The firm emphasizes a team
approach to investing so that each portfolio manager and analyst benefits from
his peers, and our clients receive Lazard's best thinking, not that of a single
individual.
PACIFIC INVESTMENT MANAGEMENT COMPANY (Fixed Income Adviser). Pacific
Investment Management Company (PIMCO) seeks to achieve maximum total return
consistent with preservation of capital and prudent investment management by
investing in a wide range of bonds and money market securities while maintaining
a duration within two years of that of the Lehman Brothers Aggregate Bond Index.
In seeking this objective, PIMCO employes a disciplined, top-down process of
investing driven by a long-term outlook for interest rates and bond market
trends. The Portfolio invests in all sectors of the fixed income markets,
including government bonds, mortgage-backed securities, corporate bonds and
foreign bonds. PIMCO seeks to assemble a portfolio comprised of the most
attractively valued sectors and securities within each sector.
RISK FACTORS
GENERAL. As with all mutual funds, investments in the Funds 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 Funds 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 Fund 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 Fund'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 Fund's fixed income component will tend to be somewhat
lower. Also, when interest rates are falling, the proceeds of new sales of a
Fund'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
Fund's fixed income component. In periods of rising interest rates, the opposite
can be expected to occur. In addition, securities in which a Fund 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.
19
<PAGE> 22
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 Funds. 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 Funds 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 Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for a Fund 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 Fund 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
20
<PAGE> 23
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Fund may decline proportionately
more than a portfolio consisting of higher-rated securities. If a Fund
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 Fund and increasing the exposure of the Fund 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 Funds may each invest in foreign debt securities, and each of
the Funds 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 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 Funds are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchanges
rates may affect the Funds' net asset
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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 Funds.
If the value of a foreign currency rises against the U.S. dollar, the value of a
Fund'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
Fund's assets denominated in that currency will decrease. Under the Internal
Revenue Code, the Funds 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 Funds' 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 Funds value their assets
daily in U.S. dollars, the Funds will not convert their holdings of foreign
currencies to U.S. dollars daily. When a Fund 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 Fund 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 Fund 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 ("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
Funds 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
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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 Fund 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 Fund 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 Fund'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 Fund 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 principal,
the Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
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
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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 Fund 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 Fund's distribution obligations, in which case the
Fund 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 Funds 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 Funds 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 Funds. 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 Funds 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 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
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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 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
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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 Fund 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 Fund's
investments in certain qualifying CMOs and REMICs are not subject to the
Investment Company Act's limitation on acquiring interests in other investment
companies. 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 Fund
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 Funds 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 Fund 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 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
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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
Fund 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 Fund
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 Fund 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 Fund 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."
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 Fund 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
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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 Funds 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 Fund may invest
will tend to reduce sharp changes in a Fund's net asset value in response to
normal interest rate fluctuations. As the coupon rates of a Fund'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
Fund'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 Fund'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 Fund
will fluctuate.
INFLATION-INDEXED BONDS
The Conservative Growth and Moderate Growth Funds 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.
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 Fund 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
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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 Fund may also invest in such custodial receipts. See "Additional Investment
Information -- Other Investments" in the Statement of Additional Information.
CONVERTIBLE SECURITIES
Each Fund 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 Funds may each engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. A Fund, 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
Fund's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that any
of these strategies will succeed. 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 Fund may use these new investments and techniques to the extent
consistent with its investment objectives and policies.
OPTIONS TRANSACTIONS. A Fund 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
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indices (e.g., S&P 500) and U.S. Government securities. The Funds may also
purchase and write put and call options on foreign currencies and foreign
currency futures. A Fund 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 Fund 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 Fund writes a call option,
the Fund 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 Fund
may write.
A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities or currency subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities for more than their current market price.
A Fund will write only "covered" options. A written option is covered if,
so long as the Fund 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 Fund's losses are limited because it
owns the underlying security; under the second circumstance, in the case of a
written call option, the Fund's losses are potentially unlimited. See
"Additional Investment Information" in the Statement of Additional Information.
A Fund may only write covered put options to the extent that cover for such
options does not exceed 25% of the Fund's net assets. A Fund 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.
OVER-THE-COUNTER OPTIONS. A Fund 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 Fund 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
Fund'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.
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FOREIGN CURRENCY EXCHANGE CONTRACTS. The Funds 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 Fund may enter into such
contracts on a spot, i.e., cash, basis at the rate then prevailing in the
currency exchange market or on a forward basis, by entering into a forward
contract to purchase or sell currency. A forward contract on foreign currency is
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days agreed upon by the parties from the date of the
contract at a price set on the date of the contract.
A Fund's dealings in forward contracts will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of a forward contract with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest or dividends receivable and
Fund expenses. Position hedging is (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 Fund may
enter into, a Fund 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 Fund'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 Fund could be in a less advantageous position than if such a
hedge had not been established.
INDEXED COMMERCIAL PAPER. The Funds 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 Fund 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 Fund will segregate cash or other liquid assets having a value at least
equal to the aggregate
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<PAGE> 34
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 Fund 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 Funds 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 Funds, and thus their investors, may lose money through any
unsuccessful use of these strategies. Futures contracts purchased by the Funds
may entitle a Fund 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 Fund's successful use of futures contracts and related options depends upon
the investment adviser's ability to predict the direction of the market and is
subject to various additional risks. The correlation between movements in the
price of a futures contract and the 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 Fund.
A Fund'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 Fund purchasing and selling futures contracts and
options thereon for bona fide hedging transactions, except that the Fund may
purchase and sell futures contracts and options thereon for any other purposes
to the extent that the aggregate initial margin and option premiums do not
exceed 5% of the market value of the Fund'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 Fund would not be subject absent the use of these strategies. A Fund,
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 Fund may leave the Fund 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
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<PAGE> 35
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 Fund to purchase or sell a portfolio security at a time
that otherwise would be favorable for it to do so, or the possible need for a
Fund 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 Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from a Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time a Portfolio's money
is invested in the repurchase agreement. A Fund's repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value of
instruments declines, a Fund will require additional collateral. In the event of
a default, insolvency or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. In such circumstances, the Fund 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 Fund will suffer a loss. See
"Additional Investment Information -- Repurchase Agreements" in the Statement of
Additional Information.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Each Fund may enter into reverse repurchase agreements, and the
Conservative Growth and Moderate Growth Funds 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 Fund of securities
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
Dollar rolls involve sales by a Fund 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 Fund forgoes principal and interest paid on the
securities. A Fund 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 Fund 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
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<PAGE> 36
agreements and dollar rolls involve the risk that the market value of the
securities retained by a Fund may decline below the price of the securities a
Fund 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 Fund'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 Fund'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 Fund for purposes of the percentage limitations applicable to
borrowings. See "Borrowing" below.
SECURITIES LENDING
Each Fund 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 Fund 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 Fund an amount
equivalent to any dividend or interest paid on such securities and a Fund 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 Fund
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 Funds may each enter into
interest rate swaps. Interest rate swaps involve the exchange by a Fund 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
Fund 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 Fund anticipates purchasing at
a later date. Each Fund 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 Fund is contractually obligated to make and will not exceed 5%
of a Fund'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
Fund would diminish compared to what it would have been if this investment
technique was never used.
INVESTMENT COMPANY SECURITIES
The Funds 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 Funds may also invest in
securities issued by other investment companies with similar
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<PAGE> 37
investment objectives. The Funds 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 Fund will not hold
more than 3% of the outstanding voting securities of any one investment company,
will not have invested more than 5% of its total assets in any one investment
company and will not have invested more than 10% of its total assets (determined
at the time of investment) in investment company securities in the aggregate. As
a shareholder of another investment company, a Fund 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 Fund bears in connection with its own operations.
ILLIQUID SECURITIES
Each Fund 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 Funds' 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 Fund 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
Fund may sell such OTC options only to qualified dealers who agree that a Fund
may repurchase any options it writes for a maximum price to be calculated by a
predetermined formula. 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 Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that a Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid. The Funds 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 Fund may purchase or sell securities on a when-issued or
delayed-delivery basis. When-issued or delayed-delivery transactions arise when
securities are purchased or sold by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
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<PAGE> 38
advantageous price and yield to a Fund at the time of entering into the
transaction. While a Fund will only purchase securities on a when-issued or
delayed-delivery basis with the intention of acquiring the securities, a Fund
may sell the securities before the settlement date, if it is deemed advisable by
the Adviser. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed-delivery basis, the Fund will record the transaction and
thereafter reflect the value, each day, of such security in determining the net
asset value of the Fund. 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 Fund's assets committed to the purchase of securities on a when-issued or
delayed-delivery basis may increase the volatility of the Fund's net asset
value. The Trust's Custodian will segregate cash or other liquid assets having a
value equal to or greater than a Fund'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 Funds 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 Fund 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 Fund will borrow the security to make delivery to
the buyer. The Fund 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
Fund. Until the security is replaced, the Fund is required to pay to the lender
any interest which accrues during the period of the loan. To borrow the
security, the Fund 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 broker to the extent necessary to meet margin requirements until the short
position is closed out. Until the Fund 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 Fund 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
Fund replaces the borrowed security. The Fund 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 Fund'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 Fund may also make short sales against-the-box. A short sale
against-the-box is a short sale in which a Fund 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
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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 Fund 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 Fund may pledge its total assets to secure these
borrowings.
If a Fund borrows to invest in securities, or if a Fund 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 Fund, the net asset value of the
Fund'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 Fund's asset coverage for borrowings falls below 300%, such Fund
will take prompt action to reduce its borrowings even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
PORTFOLIO TURNOVER
The portfolio turnover rate for each of the Funds may exceed 100%, although
the rate for each Fund 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 Fund. 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 Funds are subject to certain investment restrictions which constitute
fundamental policies. Fundamental policies cannot be changed with respect to any
Fund without the approval of a majority of the outstanding voting securities of
that Fund, 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
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the daily business operations of the Trust. The Funds' 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 Funds 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 a Fund based upon
the portion of assets the Adviser manages. Under the 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 Fund 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 Fund 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 Fund.
<TABLE>
<CAPTION>
FUND MANAGER'S FEE
---- -------------
<S> <C>
Conservative Growth......................................... .75%
Moderate Growth............................................. .75%
High Growth................................................. .75%
</TABLE>
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The Manager pays the Advisers' fees, computed daily and paid monthly, equal
to the annual rate specified below based on the average daily net assets of the
Fund segments they manage.
<TABLE>
<CAPTION>
FEE PAID BY PIFM
ADVISERS FUNDS TO ADVISERS
-------- ----- ----------------
<S> <C> <C>
Jennison Associates LLC Conservative Growth .30% with respect to the first
Moderate Growth $300 million; .25% for amounts
High Growth in excess of $300 million
The Prudential Investment Corporation Conservative Growth N/A(1)
Moderate Growth
High Growth
Lazard Asset Management Moderate Growth .40%
High Growth
Pacific Investment Management Company Conservative Growth .25%
Moderate Growth
Franklin Advisers, Inc. Conservative Growth .50%
Moderate Growth
High Growth
The Dreyfus Corporation Conservative Growth .45%
Moderate Growth
High Growth
</TABLE>
- ---------------
(1)Under the Advisory Agreement between PIFM and PIC, PIC is reimbursed by PIFM
for its reasonable costs and expenses incurred in providing advisory services
to the Fund segments PIC manages.
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
Funds, change the terms of the Funds' 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
Fund continue to have the right to terminate an Advisory Agreement for the Fund
at any time by a vote of the majority of the outstanding voting securities of
the Fund. 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 Fund segment the Adviser manages in accordance with the Fund's stated
investment objective and policies, making investment decisions for such Fund
segment, placing orders to purchase and sell securities on behalf of such Fund
segment, and performing various administrative functions associated with serving
as an Adviser.
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The Advisers furnish investment advisory services in connection with the
management of the Funds and are paid their fees by PIFM, not the Trust.
Each Adviser manages a discrete segment of the assets of a Fund. 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
Fund as the Manager deems it appropriate. By using several Advisers for the
Funds, and by periodically rebalancing a Fund 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 Fund'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 Fund 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 Fund 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:
JENNISON ASSOCIATES LLC
Jennison is a Delaware limited liability company located at 466 Lexington
Avenue, New York, NY 10017. Jennison is a wholly-owned subsidiary of The
Prudential Insurance Company of America ("Prudential"), a major diversified
insurance and financial services company.
As of June 30, 1998, Jennison had over $42.7 billion in assets under
management for institutional and mutual fund clients. David Poiesz, CFA, is
responsible for the day-to-day management of the Fund segments managed by
Jennison. Mr. Poiesz, a Director and Executive Vice President of Jennison,
joined Jennison in 1983 as an equity research analyst and has been an equity
portfolio manager since 1991. Mr. Poiesz also serves as the portfolio manager of
the Prudential Jennison Portfolio of the Prudential Series Fund, Inc. and the
Prudential Jennison Growth Fund of The Prudential Investment Portfolios, Inc.
THE PRUDENTIAL INVESTMENT CORPORATION
PIC is a New Jersey corporation located at Prudential Plaza, Newark, NJ
07102-3777. PIC is a wholly-owned subsidiary of Prudential, a major diversified
insurance and financial services company.
Thomas R. Jackson, a Managing Director of PIC, is responsible for the
day-to-day management of the large-cap value equity Fund segments managed by
PIC. Mr. Jackson also serves as the portfolio manager of the Common Stock
Portfolio of The Prudential Series Fund, Inc., which is one of the investment
options in a Prudential variable life and annuity product, and the Prudential
Equity Fund, Inc. Mr. Jackson joined PIC in 1990 and has over 30 years of
professional equity investment management experience. He was formerly co-chief
investment officer of Red Oak Advisers and Century Capital Associates, each a
private money management firm, where he managed pension and other accounts for
institutions and individuals. He was also with The Dreyfus Corporation where he
managed and served as president of the Dreyfus Fund. Mr. Jackson also managed an
equity pension investment group at Chase Manhattan Bank.
40
<PAGE> 43
George Edwards, CFA, oversees the team responsible for the day-to-day
management of the high yield bond segments managed by PIC. Mr. Edwards is also a
co-manager of Prudential High Yield Fund and the Prudential Distressed
Securities Fund and the manager of the Prudential Series Fund/High Yield Bond
Portfolio. Before joining the mutual fund group in 1989, Mr. Edwards worked in
Prudential's investment grade bond unit. He was previously and analyst at
McCarthy, Crisanti & Maffei (now MCM-Duff & Phelps).
FRANKLIN ADVISERS, INC.
Franklin is a California corporation located at 777 Mariners Island Blvd.,
San Mateo, CA 94404. Franklin is a wholly-owned subsidiary of Franklin
Resources, Inc., a publicly-owned company engaged in the financial services
industry through its subsidiaries. Franklin advises 97 domestic equity and fixed
income mutual funds in the Franklin Templeton Group of funds. As of June 30,
1998, Franklin and its affiliates managed over $230 in assets.
Edward B. Jamieson, Micheal McCarthy and Aidan O'Connell are responsible
for the day-to-day management of the small/mid-cap growth equity Fund segments
managed by Franklin. Mr. Jamieson is an Executive Vice President of Franklin and
Managing Director of Franklin's equity and high yield groups and has been with
Franklin since 1987. Mr. McCarthy joined Franklin in 1992 and is a vice
president and portfolio manager specializing in research analysis of several
technology groups. Mr. O'Connell joined Franklin in 1998 and is a research
analyst specializing in research analysis of the semiconductor and semiconductor
capital equipment industries.
THE DREYFUS CORPORATION
The Dreyfus Corporation has its headquarters at [add address]. Dreyfus is a
subsidiary of Mellon Bank corporation, a broad-based financial services company
with a bank at its core, and over $300 billion under management or
administration. Dreyfus currently manages over $100 billion in assets in both
equity and fixed income mutual funds.
William P. Rydell, CFA and Mark W. Sikorski, CFA, co-manage the Fund
segments managed by Dreyfus. Mr. Rydell is a portfolio manager of Dreyfus and is
the President and Chief Executive Officer of Mellon Equity Associates. Mr.
Rydell has been in the Mellon organization since 1973. Mr. Sikorski is a
portfolio manager of Dreyfus and a Vice President of Mellon Equity Associates.
Mr. Sikorski has been in the Mellon organization since 1996. Prior thereto, Mr.
Sikorski managed various corporation treasury projects for Northeast Utilities,
including bond refinancing and investment evaluations.
LAZARD ASSET MANAGEMENT
Lazard is a division of Lazard Freres & Co. LLC ("Lazard Freres"), a New
York limited liability company located at 30 Rockefeller Plaza, New York, NY
10112. Lazard provides investment management services to both individual and
institutional clients and as of December 31, 1997, had more than $60 billion in
assets under management. In addition to portfolio management, Lazard Freres
provides a wide variety of investment banking and related services. Lazard also
manages the International Equity Portfolio and half of the Small Capitalization
Value Portfolio of The Target Portfolio Trust.
Herbert W. Gullquist and John R. Reinsberg are primarily responsible for
the day-to-day management of the international equity Fund segments managed by
Lazard. Mr. Gullquist is a
41
<PAGE> 44
Managing Director and a Vice-Chairman of Lazard Freres, is the Chief Investment
Officer of LAM and has been employed with both since 1982. Mr. Reinsberg is a
Managing Director of Lazard Freres and has been employed there since 1991. Prior
thereto, he was Executive Vice President of General Electric Investment
Corporation.
PACIFIC INVESTMENT MANAGEMENT COMPANY
PIMCO is a Delaware general partnership located at 840 Newport Center
Drive, Newport Beach, CA 92660. PIMCO is a subsidiary of PIMCO Advisors L.P.
("PIMCO Advisors"). The general partners of PIMCO Advisors are PIMCO Partners,
G.P. and PIMCO Advisors Holdings L.P. ("PAH"). PIMCO Partners, G.P. is a general
partnership between PIMCO Holding LLC, a Delaware limited liability company and
indirect wholly-owned subsidiary of Pacific Life Insurance Company, and PIMCO
Partners LLC, a California limited liability company controlled by the PIMCO
Managing Directors. PIMCO Partners, G.P. is the sole general partner of PAH.
PIMCO is registered as an investment advisor with the Commission and as a
commodity trading advisor with the CFTC. As of December 31, 1997, PIMCO had
approximately $118 billion of assets under management. PIMCO also manages the
Intermediate-Term Bond and Total Return Bond Portfolios of The Target Portfolio
Trust.
John L. Hague is responsible for the day-to-day management of the fixed
income Fund segments managed by PIMCO. Mr. Hague is a Managing Director of
PIMCO, and has managed fixed income assets for PIMCO and its predecessor since
1989.
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 Funds. Fee
waivers and expense subsidies will increase a Fund'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 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 Fund shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, each Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for
42
<PAGE> 45
specific expenses incurred. If the Distributor's expenses exceed its
distribution and service fees with respect to a Fund, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis 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 Fund's shares and the
maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, EACH FUND 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 FUND 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 Fund 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 Fund 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 Fund bears its own expenses under the Plans, and the distribution fee and
sales charge of one class of a Fund will not be used to subsidize the sale of
the Fund's other classes.
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 Fund. A
Fund 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 Fund 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
43
<PAGE> 46
Dealers and other persons which distribute shares of the Funds (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 Fund. In order for an affiliated broker to effect any portfolio
transactions for a Fund 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 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. Computer
software problems associated with the year 2000 may also have a negative impact
on the business operations of issuers whose securities are held by the Funds and
could adversely affect the value of those securities. 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.
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
Fund 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 Fund'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.
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<PAGE> 47
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 Fund.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUNDS
SUBSCRIPTION PERIOD
The following procedures only apply to investors who wish to purchase
shares of a Fund directly from the Trust, through its transfer agent, Prudential
Mutual Fund Services LLC ("PMFS" or the "Transfer Agent").
The Distributor will solicit subscriptions for Class A, Class B, Class C
and Class Z shares of the Funds during a subscription period (the "Subscription
Period"). The Subscription Period will commence on or about October 8, 1998 and
is expected to end on or about November 13, 1998 (but no later than December 1,
1998). To subscribe for shares of a Fund during the Subscription Period, an
investor must complete a New Account Application specifying the Fund and share
class selected by the investor and authorizing the Transfer Agent to place the
investment initially and for the duration of the Subscription Period in shares
of Prudential MoneyMart Assets, Inc. (the "Money Market Fund Shares") and to
subsequently exchange the Money Market Fund Shares for shares of the Fund. At
the end of the Subscription Period (the "Exchange Date"), all amounts invested
in the Money Market Fund Shares and designated for the purchase of Fund shares
will be exchanged for shares of the Fund designated by the investor on the New
Account Application. With respect to investors who did not previously own shares
of Prudential MoneyMart Assets, Inc., any dividends accrued on the Money Market
Fund Shares will also be exchanged for Fund shares selected by the investor.
Settlement on this exchange transaction will occur within three business days
after the Exchange Date. An initial sales charge will generally be imposed on
each transaction in Class A and Class C shares, unless a waiver applies. See
"Alternative Purchase Plan" below.
Investors who wish to subscribe for Fund shares through a selected dealer
during the Subscription Period must do so in accordance with the requirements of
their accounts with such dealers.
The minimum initial investment during the Subscription Period is $1,000 for
Class A and Class B shares and $2,500 for Class C shares. There are no minimum
investment requirements for certain retirement and employee savings plans or
custodial accounts for the benefit of minors.
Subscribers for shares will not have any of the rights of a shareholder of
a Fund until the shares subscribed for have been issued to the subscriber and
such issuance is reflected in the books of the Trust. The Trust reserves the
right to withdraw, modify or terminate the initial offering without notice and
to refuse any order in whole or in part. Shareholders who purchase their shares
during the Subscription Period will not receive share certificates.
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<PAGE> 48
CONTINUOUS OFFERING OF SHARES
The Trust anticipates that a continuous offering of its shares will
commence on or about December 1, 1998. Shareholders who subscribe for shares
during the Subscription Period may redeem shares prior to December 1, 1998, but
cannot purchase additional shares until the continuous offering begins.
YOU MAY PURCHASE SHARES OF THE FUNDS THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUCO SECURITIES CORPORATION
("PRUSEC"), OR DIRECTLY FROM THE TRUST THROUGH 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
at the time of purchase, on a deferred basis, or both. Class A shares are sold
with a front-end sales charge. Class B shares are subject to a
contingent-deferred sales charge. Class C shares are sold with a low front-end
sales charge, but are also subject to a contingent-deferred sales charge. Class
Z shares are offered to a limited group of investors at net asset value without
any sales charge. 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
$2,500 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 Investment Plan, the minimum initial
and subsequent investment is $50. See "Shareholder Services" below.
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 Fund) 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.
Dealers may charge their customers a separate fee for processing purchases
and redemptions. In addition, transactions in shares of the Funds may be subject
to postage and handling charges imposed by your Dealer. Any such charges are
retained by the Dealer and are not remitted to the Funds.
Purchase by Wire. For an initial purchase of shares of a Fund by wire, you
must complete an application and telephone PMFS to receive an account number at
(800) 225-1852 (toll-free). The
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<PAGE> 49
following information will be requested: your name, address, tax identification
number, the Fund 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 Diversified Funds, specifying on the
wire the account number assigned by PMFS and your name and the Fund 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 Fund 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 Fund, 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.
ALTERNATIVE PURCHASE PLAN
THE TRUST OFFERS FOUR CLASSES OF SHARES IN EACH FUND (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 Fund 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
47
<PAGE> 50
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 Fund 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 Fund.
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 Funds and will generally receive more compensation initially for
selling Class A and Class B shares than for selling Class C or Class Z shares.
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 Funds.
If you intend to hold your investment in a Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6-year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less
than 5 years, and do not qualify for a reduced sales charge on Class A shares,
you should consider purchasing Class B or Class C shares over Class A shares.
This is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you 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.
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<PAGE> 51
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 5 years for the higher cumulative annual distribution-related fee on
those shares plus, in the case of Class C shares, the 1% initial sales charge to
exceed the initial sales charge plus 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.
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 may 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
Funds 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.
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<PAGE> 52
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.
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 Funds 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
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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 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
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<PAGE> 54
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 2% of the purchase price at the time of the
sale.
Class Z Shares
Class Z shares of each Fund 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 Fund is an available option (collectively, "Benefit Plans"),
provided that such Benefit Plans (in combination with other plans sponsored by
the same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants in any fee-based program or trust
program sponsored by an affiliate of the Distributor which includes mutual funds
as investment options and for which the Fund is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by 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 FUNDS 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 "Net Asset Value." 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
Fund through a Dealer, your Dealer must receive your sell order before the Fund
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 Funds.
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
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<PAGE> 55
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 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 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 (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 Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as 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 Fund is obligated to redeem
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shares solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund
during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Funds, 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 Fund 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 Fund 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 Funds 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
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 Funds 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
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<PAGE> 57
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
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 Fund shares made during the preceding six
years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of shares
held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares of a Fund 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
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<PAGE> 58
of an IRA (including a Roth IRA), a lump-sum or other distribution after
attaining age 59 1/2 or a periodic distribution based on life expectancy; (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 Fund will automatically convert to Class A shares of
the same Fund 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 Fund purchased at
least seven years prior to the conversion date to (b) the total amount paid for
all Class B shares of the same
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Fund purchased and then held in your account (ii) multiplied by the total number
of Class B shares of that Fund purchased and then held in your account. Each
time any Eligible Shares of a Fund in your account convert to Class A shares,
all shares or amounts representing Class B shares of the same Fund 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 Fund were initially purchased
at $10 per share (for a total of $1,000) and a second purchase of 100 shares of
the same Fund was subsequently made at $11 per share (for a total of $1,100),
95.24 shares of that Fund 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 Fund 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 Fund 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 Funds 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 INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES OF A FUND
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<PAGE> 60
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) 225-1852 to execute a telephone exchange of shares, on weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE 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 Fund which
are not subject to a CDSC held in such a shareholder's account will be
automatically exchanged for Class A shares of that Fund 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 Fund, will have their Class B and Class C shares of that
Fund which are not subject to a CDSC and their Class A shares of that Fund
exchanged for Class Z shares on a
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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 Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares of
the Fund 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 Funds 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 Funds 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 Funds, 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 Fund 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.
- AUTOMATIC INVESTMENT PLAN ("AIP"). Under AIP 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
59
<PAGE> 62
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) 225-1852 (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) 225-1852 (toll-free) or, from outside the U.S.A. at (732)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential makes
available optional group term life insurance coverage to purchasers of shares of
certain Prudential Mutual Funds which are held in an eligible brokerage account.
This insurance protects the value of your mutual fund investment for your
beneficiaries against market downturns. The insurance benefit is based on the
difference at the time of the insured's death between the "protected value" and
the then current market value of the shares. This coverage is not available in
all states and is subject to various restrictions and limitations. For more
complete information about this program, including charges and expenses, please
contact your Prudential representative.
60
<PAGE> 63
TAXES, DIVIDENDS AND DISTRIBUTIONS
Each Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, each
Fund 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
Fund's income is derived from certain dividends received from domestic
corporations, a portion of the dividends paid to corporate shareholders of the
Fund will be eligible for the 70% 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 Fund will be
declared and paid quarterly with respect to the Conservative Growth Fund,
semi-annually with respect to the Moderate Growth Fund and annually with respect
to the High Growth Fund. Distributions of any net realized long-term and
short-term capital gains earned by a Fund will be made at least annually.
Dividends paid by each Fund 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 Fund will be deferred under the "wash sale" rules of
the Internal Revenue
61
<PAGE> 64
Code if the shareholder acquires shares in such Fund 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 Funds 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 Funds 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 Funds' assets to be invested within
various countries is not known. The Funds intend to operate so as to qualify for
treaty-reduced rates of tax where applicable. Furthermore, if a Fund qualifies
as a regulated investment company, if certain distribution requirements are
satisfied, and if more than 50% of the value of the Fund's assets at the close
of the taxable year consists of stocks or securities of foreign corporations,
the Fund may elect, for U.S. federal income tax purposes, to treat foreign
income taxes paid by the Fund that can be treated as income taxes under U.S.
income tax principles as paid by its shareholders. If the Fund were to make an
election, an amount equal to the foreign income taxes paid by the Fund 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 Fund 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 Fund will satisfy the requirements for making the election
to treat shareholders as having paid foreign taxes paid by the Fund.
A Fund 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 Fund's investments in
PFICs are subject to special tax provisions that may result in the taxation of
certain gains realized and unrealized by the Fund.
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 Fund 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 Fund's investment company taxable income available to be distributed
to shareholders as ordinary income, rather than increasing or decreasing the
amount of the Fund's net capital gain. If currency fluctuation losses exceed
other investment company taxable income during
62
<PAGE> 65
a taxable year, distributions made by the Fund during the year would be
characterized as a return of capital to shareholders, reducing the shareholder's
basis in their Fund shares.
Under the Internal Revenue Code, each Fund 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).
As a result of the allocation and any rebalancing of assets among the
Advisers of each of the Funds, 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 Fund are taxed as ordinary
income. Additionally, Funds 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 Fund 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 Fund will notify each
shareholder after the close of each Fund'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 Fund.
The foregoing is a general summary of the U.S. federal income tax
consequences of investing in a Fund. 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 FUND'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 Fund 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 Fund) assuming that all
distributions and dividends paid by the Fund 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
63
<PAGE> 66
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 Funds 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) 225-1852 or by writing to the Trust at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
DESCRIPTION OF SHARES
The Trust was organized as a Delaware business trust on July 29, 1998 under
an Agreement and Declaration of Trust. The Agreement and Declaration of Trust
permits the Board of Trustees to issue an unlimited number of shares of
beneficial interest (par value $.001 per share) of one or more separate series
and classes representing interests in different investment portfolios and share
classes thereof.
The shareholders of the Funds are each entitled to a full vote for each
full share of beneficial interest held and fractional votes for fractional
shares. Shares of each Fund 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 Fund have to approve changes in certain
investment policies of a Fund.
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 Funds to the Trust or, with the approval of the Shareholders of an
existing Fund, if necessary, terminate one or more of the Funds.
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.
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<PAGE> 67
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.
OTHER INFORMATION ON PERFORMANCE
Each of the Advisers also serves as the investment adviser of other funds.
In each case, the performance information shown below depicts the only other
fund(s) with investment objectives, policies and strategies that are
substantially similar to those of the respective Fund and managed by the same
portfolio manager. The portfolio manager of the accounts constituting the
Dreyfus Small Capitalization Equity Composite ("Dreyfus Composite") served as
such since inception of each account. In addition, the respective portfolio
managers of Lazard International Equity Fund, Target International Equity
Portfolio and Target Intermediate-Term Bond Fund have served as such since the
inception of each fund. Each of the portfolio managers of the other funds shown
below has served as such since the following dates: Prudential Equity Fund,
April, 1990; Prudential Jennison Growth Fund, April, 1996; Prudential High Yield
Fund, March, 1998; and Franklin Small Cap Growth I Fund, March, 1993. As
described in this prospectus, each Adviser will have responsibility for a
portion of each Fund; in contrast, the respective Advisers have sole
responsibility for the funds shown below. With the exception of the Dreyfus
Composite, the performance information shown in the table below reflects the
expense ratio of each fund presented, which may differ from that of the
corresponding Fund.
The accounts comprising the Dreyfus Composite include an account that was
not registered under the 1940 Act and therefore was not subject to the
diversification and other requirements of the 1940 Act and the Internal Revenue
Code. If the account had been subject to these requirements, its performance
might have been adversely affected. The performance of the Dreyfus Composite was
computed using a method based on the standards developed by the Association of
Investment Management & Research ("AIMR"), which differs from the performance
standards required by the Securities and Exchange Commission for registered
mutual funds. The performance information for the Dreyfus Composite has been
adjusted to give effect to an expense ratio of 1.25%, which is expected to apply
to Class Z Shares of the Moderate Growth Fund. The Morningstar categories
presented are those that include funds most similar in investment objective and
policies to the applicable Fund, managed similarly to the Fund segments
allocated to the applicable Adviser.
The performance Information below should not be viewed as a substitute for
the Funds' own performance. The performance of the Funds will differ from the
performance of the funds and Morningstar categories shown below. Past
performance of the funds and Morningstar categories should not be considered a
prediction of future performance of the Funds.
The Advisers were selected based on their adherence to an investment style
that was desired for their portion of the Funds, as well as their successful
performance track records in the following funds:
65
<PAGE> 68
<TABLE>
<CAPTION>
ANNUALIZED TOTAL RETURNS AS OF 6/30/98
-----------------------------------------------------------------------
SINCE
FUND NAME YTD 1 YEAR 3 YEARS 5 YEARS INCEPTION INCEPTION DATE
--------- ------------- ------ ------- ------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Adviser: The Prudential Investment
Corporation
Prudential Equity Fund A Shares.......... 12.11 22.96 22.59 19.00 17.38 01/22/90
Morningstar Large-Cap Value Funds
Category Average...................... 10.30 20.94 23.53 18.55
Difference............................... 1.81 2.02 -0.94 0.45
Adviser: Jennison Associates LLC
Prudential Jennison Growth Fund Z
Shares................................ 20.79 35.84 26.42 21.48 21.73 11/05/92
Morningstar Large-Cap Growth Funds
Category Average...................... 20.29 30.94 25.79 20.12
Difference............................... 0.50 4.90 0.63 1.36
Adviser: The Prudential Investment
Corporation
Prudential High Yield Fund
A Shares.............................. 4.10 11.16 12.33 10.08 11.66 01/22/90
Morningstar High Yield Funds Category
Average............................... 4.35 11.34 12.31 9.88
Difference............................... -0.25 -0.18 0.02 0.20
Adviser: Lazard Asset Management
Lazard International Equity Portfolio
Institutional Shares.................. 18.68 18.11 18.70 16.10 12.39 10/01/91
Morningstar Foreign Stock Funds Category
Average 15.77 8.35 12.48 12.08
Difference............................... 2.91 9.76 6.22 4.02
Adviser: Lazard Asset Management
Target International Equity Portfolio.... 18.65 17.00 18.25 16.57 16.52 01/05/93
Morningstar Foreign Stock Funds Category
Average............................... 15.77 8.35 12.48 12.08
Difference............................... 2.88 8.65 5.77 4.49
Adviser: Pacific Investment Management
Company
Target Intermediate-Term Bond
Portfolio............................. 3.12 8.91 7.80 6.81 7.30 01/05/93
Morningstar Intermediate Bond Funds
Category Average...................... 3.66 9.57 7.24 6.22
Difference............................... -0.54 -0.66 0.56 0.59
Adviser: Franklin Advisers, Inc.
Franklin Small-Cap Growth I.............. 6.06 13.85 20.53 23.84 20.43 02/14/92
Morningstar Small Cap Growth 7.33 15.75 17.55 15.70
Funds Category Average................ -1.27 -1.90 2.98 8.14
</TABLE>
66
<PAGE> 69
<TABLE>
<CAPTION>
ANNUALIZED TOTAL RETURNS AS OF 6/30/98
-----------------------------------------------------------------------
SINCE
FUND NAME YTD 1 YEAR 3 YEARS 5 YEARS INCEPTION INCEPTION DATE
--------- ------------- ------ ------- ------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Adviser: The Dreyfus Corporation
Small Cap Russell 200 Value Equity
Composite............................. 6.35 31.85 NA NA 32.65 12/31/96
Morningstar Small Cap Value Funds
Category Average...................... 4.70 17.45 20.96 16.89 13.31
Difference............................... 2.90 15,65 NA NA
</TABLE>
- ---------------
Sources: Mutual fund performance and expenses from Lipper Analytical Services;
Dreyfus separate account performance from Dreyfus; Morningstar averages from
Morningstar Inc.
According to Lipper Analytical Services, the expense ratio for each of the
funds listed above as of September 16, 1998 was as follows:
<TABLE>
<CAPTION>
EXPENSE
FUND RATIO
---- -------
<S> <C>
Prudential Equity Fund A Shares.... 0.88
Prudential Jennison Growth Fund Z
Shares........................... 0.84
Prudential High Yield Fund A
Shares........................... 0.69
Lazard International Equity
Portfolio Institutional Shares... 0.89
</TABLE>
<TABLE>
<CAPTION>
EXPENSE
FUND RATIO
---- -------
<S> <C>
Target International Equity
Portfolio........................ 0.93
Target Intermediate-Term Bond Port-
folio............................ 0.71
Franklin Small-Cap Growth I Fund... 0.89
</TABLE>
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<PAGE> 70
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
-----
<S> <C>
Fund Highlights............................. 2
Trust Expenses.............................. 5
Description of the Funds.................... 11
Investment Objectives and Policies........ 11
Other Investments and Policies............ 22
Investment Restrictions................... 37
Management of the Trust..................... 37
Manager................................... 38
Advisers.................................. 39
Distributor............................... 42
Portfolio Transactions.................... 44
Year 2000................................. 44
Net Asset Value............................. 44
Shareholder Guide........................... 45
How to Buy Shares of the Funds............ 45
Alternative Purchase Plan................. 47
Conversion Feature -- Class B Shares...... 56
How to Exchange Your Shares................. 57
Shareholder Services........................ 59
Taxes, Dividends and Distributions.......... 61
General Information......................... 63
Performance Information................... 63
Description of Shares..................... 64
Custodian and Transfer and Dividend
Disbursing Agent........................ 64
Additional Information.................... 65
Other Information on Performance.......... 65
</TABLE>
------------------------
[Add PMF #]
<TABLE>
<S> <C>
CUSIP NOS.:
Conservative Growth Fund --
Moderate Growth Fund --
High Growth Fund --
</TABLE>
[LOGO]
PRUDENTIAL DIVERSIFIED FUNDSSM
PROSPECTUS
OCTOBER 1, 1998
<PAGE> 71
PRUDENTIAL DIVERSIFIED FUNDS(SM)
Statement of Additional Information
October 1, 1998
Prudential Diversified Funds(SM) (the "Trust") is an open-end, management
investment company currently composed of three separate investment portfolios
(the "Funds") professionally managed by Prudential Investments Fund Management
LLC ("PIFM" or the "Manager"). Each Fund 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 Funds:
- Prudential Diversified Conservative Growth Fund (the "Conservative Growth
Fund")
- Prudential Diversified Moderate Growth Fund (the "Moderate Growth Fund")
- Prudential Diversified High Growth Fund (the "High Growth Fund")
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 11
Additional Investment Information........................... B-2 21
Investment Restrictions..................................... B-20 36
Trustees and Officers....................................... B-21 36
Manager and Advisers........................................ B-23 36
Distributor................................................. B-25 41
Portfolio Transactions and Brokerage........................ B-26 42
Purchase and Redemption of Shares........................... B-28 43
Shareholder Investment Account.............................. B-31 43
Net Asset Value............................................. B-36 43
Taxes, Dividends and Distributions.......................... B-37 60
Performance Information..................................... B-39 62
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants................................... B-39 63
Report of Independent Accountants........................... B-41
Financial Statements........................................ B-42 --
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> 72
INVESTMENT POLICIES
ADDITIONAL INVESTMENT INFORMATION
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government securities.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Fund 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 Fund 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 Fund reinvests the prepaid amounts in
securities, the yields which reflect interest rates prevailing at that time.
Therefore, a Fund'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 Fund.
At a time when a Fund 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 held in the Fund
above the strike price would likely be partially or wholly offset by unrealized
losses on
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call options written by a Fund. The termination of option positions under these
conditions would generally result in the realization of capital losses, which
would reduce a Fund's capital gains distribution. Accordingly, a Fund 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 Funds 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 Funds 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 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
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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.
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
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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 Fund'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 Fund selects CMOs or REMICs that do not meet the
above requirements, the Fund 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 Fund 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 Fund will not invest more than 5% of its net assets
in such custodial receipts.
LOAN PARTICIPATIONS. Each of the Conservative Growth and Moderate Growth
Funds 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 Fund 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 Fund will look to the agent bank to collect principal of and
interest on a participation interest, to 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
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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 Fund acts as co-lender in connection with a participation interest
or when the Fund acquires a participation interest the terms of which provide
that the Fund will be in privity with the corporate borrower, the Fund will have
direct recourse against the borrower in the event the borrower fails to pay
scheduled principal and interest. In cases where the Fund lacks such direct
recourse, the Fund will look to the agent bank to enforce appropriate credit
remedies against the borrower.
The Funds 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 Fund may incur
additional credit risk, however, when a Fund is in the position of participant
rather than a co-lender because the Fund 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 Fund and the co-lender. However, in acquiring
participation interests, the Fund will conduct analysis and evaluation of the
financial condition of each such co-lender and participant to ensure that the
participation interest meets the Fund's high quality standard and will continue
to do so as long as it holds a participation. For purposes of a Fund's
requirement to maintain diversification for tax purposes, the issuer of a loan
participation will be the underlying borrower. In cases where a Fund does not
have recourse directly against the borrower, both the borrower and each agent
bank and co-lender interposed between the Fund and the borrower will be deemed
issuers of the loan participation for tax diversification purposes.
For purposes of each Fund's fundamental investment restriction against
investing 25% or more of its total assets in any one industry, a Fund 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 Fund 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 Funds 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 Fund 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 Fund writes a call
option, the Fund 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.
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 Fund becomes
obligated during the term of the option, upon exercise of the option, to
purchase the
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securities underlying the option at the exercise price. The Fund 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 Fund 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 Fund 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
Fund's investments and therefore the put option may not provide complete
protection against a decline in the value of the Fund's investments below the
level sought to be protected by the put option.
A Fund 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 Fund 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 Fund intends to acquire. In such circumstances the Fund 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 Fund 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 Fund.
A Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised, the Fund's
maximum gain will be the premium it received for writing the option, adjusted
upwards or downwards by the difference between the Fund'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
Fund's maximum gain will be the premium received by it for writing the option,
adjusted upwards or downwards by the difference between the Fund'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 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
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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 Fund and its counter-party with no clearing
organization guarantee. Thus, when the Fund 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 Fund as well as the loss of
the expected benefit of the transaction. The Trustees will approve a list of
dealers with which the Funds may engage in OTC options.
When a Fund 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 Fund originally wrote the OTC option.
While the Fund 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
Fund, there can be no assurance that the Fund will be able to liquidate an OTC
option at a favorable price at any time prior to expiration. Until the Fund is
able to effect a closing purchase transaction in a covered OTC call option the
Fund 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 Fund may be unable to liquidate
an OTC option.
OTC options purchased by a Fund 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 Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund 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 Fund may write only "covered" options. A call option written by the
Fund is "covered" if the Fund owns the security underlying the option or has an
absolute and immediate right to acquire that security without additional
consideration (or for additional consideration segregated by its Custodian) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is equal
to or less than the exercise price of the call written; where the exercise price
of the call held is greater than the exercise price of the call written, the
Fund will segregate cash or other liquid assets with its Custodian. A put option
written by the Fund is "covered" if the Fund holds on a share-for-share basis a
put on the same security as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written;
otherwise the Fund will 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 Fund 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 Fund, 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 Fund 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 Fund, as a writer of a covered GNMA
call holding GNMA Certificates as "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,
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the Fund 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 Fund 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 Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund 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 Fund will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some 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 Fund would have to exercise its exchange-traded options in order
to realize any profit and may incur transaction costs in connection therewith.
If the Fund as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
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 Fund engages
in options transactions, the Fund 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 Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund 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 Fund 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 Fund owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, the Fund 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
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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 Fund owns or intends to purchase will probably not correlate
perfectly with movements in the level of an index and, therefore, the Fund 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 Fund 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 Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise price,
the Fund 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 Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
RISKS OF OPTIONS ON INDICES. A Fund'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 Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which could
result in substantial losses to the Fund. It is the policy of each Fund to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. A Fund
will not purchase or sell any index option contract unless and until, in the
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 Fund cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, a Fund 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 Fund's security holdings probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
security holdings. It is also possible that the index may rise when the Fund's
stocks do not rise. If this occurred, the Fund would experience a loss on the
call which is not offset by an increase in the value of its portfolio and might
also experience a loss in its portfolio. However, because the value of a
diversified portfolio will, over time, tend to move in the
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same direction as the market, movements in the value of the Fund in the opposite
direction as the market would be likely to occur for only a short period or to a
small degree.
Unless a Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 33 1/3% of
the Fund's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When a Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such securities might decline before they can be sold.
This timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on the
date the exercise notice is filed with the clearing corporation and the close of
trading on the date the Fund exercises the call it holds or the time the Fund
sells the call which, in either case, would occur no earlier than the day
following the day the exercise notice was filed.
If the Fund holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change causes
the exercised option to fall out-of-the-money, the Fund will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although the
Fund may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff time or by selling rather than exercising an
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely because the cutoff times for index
options may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
FUTURES CONTRACTS
Each Fund may each enter into futures contracts. As a purchaser of a
futures contract, a Fund incurs an obligation to take delivery of a specified
amount of the obligation underlying the futures contract at a specified time in
the future for a specified price. As a seller of a futures contract, the Fund
incurs an obligation to deliver the specified amount of the underlying
obligation at a specified time in return for an agreed upon price. A Fund 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
Fund 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 Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the Adviser anticipates that interest rates may
rise and, concomitantly, the price of the Fund's securities holdings may fall,
the Fund may sell a futures contract. If declining interest rates are
anticipated, the Fund may purchase a futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by the Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts. In addition, futures
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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 Fund
will be able to enter into a closing transaction.
When a Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction an "initial margin" of cash or 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 Fund upon the proper termination of the
futures contract. The margin deposits made are marked-to-market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, 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 Funds 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 Fund may only write "covered" put and call options on futures contracts.
A Fund will be considered "covered" with respect to a call option it writes on a
futures contract if the Fund 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 Fund
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 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 Fund's assets which
can be segregated.
A Fund 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
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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 Fund may
purchase or sell futures contracts or purchase related options thereon for bona
fide hedging transactions without limit. In addition, a Fund 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 Fund. There is no overall limitation on the percentage of the
Fund'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 Fund is exempt from registration as a commodity pool operator.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A Fund may
sell a futures contract to protect against the decline in the value of
securities held by the Fund. However, it is possible that the futures market may
advance and the value of securities held in the Fund's portfolio may decline. If
this were to occur, the Fund would lose money on the futures contracts and also
experience a decline in value in its portfolio securities.
If a Fund 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 Fund 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 Fund 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 Fund 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 Fund; (b) cash
held by the Fund; (c) cash proceeds due to the Fund 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 Fund 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 Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if a Fund 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 Fund 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 Fund.
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 Fund would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if the Fund has insufficient cash, it may
be disadvantageous to do so. In addition, the Fund 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 Fund's ability to
hedge its portfolio effectively.
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In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures or options thereon, the Fund 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 Fund 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 Fund'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 Fund'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 Fund 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 Fund 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 Fund
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 Fund
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 Funds 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 Fund the right to sell a currency at the
exercise price until the option expires. A call option gives a Fund 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 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.
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FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Funds may each enter into forward foreign currency exchange contracts
in several circumstances. When a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when a Fund anticipates
the receipt in a foreign currency of dividends or interest payments on a
security which it holds, the Fund may desire to "lock-in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for a fixed
amount of dollars, for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, a Fund may be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when an Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, a Fund
may enter into a forward contract for a fixed amount of dollars, to sell the
amount of foreign currency approximating the value of some or all of the Fund's
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 Fund does not intend to enter into such forward
contracts to protect the value of its portfolio securities on a regular or
continuous basis. A Fund 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 Fund to deliver an amount of foreign currency in
excess of the value of the Fund's securities holdings or other assets
denominated in that currency. However, the Funds believe that it is important to
have the flexibility to enter into such forward contracts when it determines
that the best interests of the Fund will thereby be served.
A Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
A Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, a Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of a Fund'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
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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 Fund values its assets daily in terms of U.S. dollars, it
does not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Fund at one rate, while offering a lesser rate of exchange should the Fund
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 Fund may write put and call options on stocks only if they are covered,
and such options must remain covered so long as the Fund is obligated as a
writer. The Funds 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 Fund'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 Fund 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 Fund
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 Fund will write call options on indices only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When a Fund writes
a call option on a broadly-based stock market index, the Fund will segregate
with its Custodian, or pledge to a broker as collateral for the option, cash,
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 Fund has written an option on an industry or market segment index, it
will segregate with its Custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities," all of which are stocks of issuers
in such industry or market segment, with a market value at the time the option
is written of not less than 100% of the current index value times the multiplier
times the number of contracts. Such stocks will include stocks which represent
at least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the Fund's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount so
segregated or pledged in the case of broadly-based stock market index options or
25% of such amount in the case of industry or market segment index options. If
at the close of business on any day the market value of such qualified
securities so segregated or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will so segregate
or pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when a Fund writes a call on an index which is
in-the-money at the time the call is written, the Fund will segregate with its
Custodian or pledge to the broker as collateral cash or other liquid assets
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on NASDAQ against
which a Fund has not written a stock call option and which has not been hedged
by the Fund by the sale of stock index futures. However, if the Fund holds a
call on the same index as the call written where the exercise price of the call
held is equal to or less than the exercise price of the call written or greater
than the exercise price of the call written if the difference is segregated by
the Fund in cash or other liquid assets with its Custodian, it will not be
subject to the requirements described in this paragraph.
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A Fund 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 Fund is subject or to which the Fund
expects to be subject in connection with future purchases. A Fund may engage in
such transactions when they are economically appropriate for the reduction of
risks inherent in the ongoing management of the Fund. A Fund may write options
on futures contracts to realize through the receipt of premium income a greater
return than would be realized in the Fund's securities holdings alone.
REPURCHASE AGREEMENTS
Each Fund 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 Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligation to
repurchase are less than the repurchase price, the Fund will suffer a loss.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, each Fund may lend
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by a Fund, 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 Fund
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 Fund on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, a Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases 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
Fund'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 Fund. Any gain or loss in the
market price during the loan period would inure to a Fund. The creditworthiness
of firms to which a Fund 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 Fund 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 Fund's investment in such
loaned securities. A Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, each Fund 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 Fund will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, a Fund may sell the securities before
the settlement date, if it is deemed advisable. At the time a Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis, a
Fund will record the transaction and thereafter reflect the value, each day, of
such security in determining the net asset value of a Fund. At the
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<PAGE> 88
time of delivery of the securities, the value may be more or less than the
purchase price. A Fund will also segregate with a Fund'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 Fund may purchase
securities on such basis without limit. An increase in the percentage of a
Fund's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of a Fund's net asset value.
The Manager and the Advisers do not believe that a Fund's net asset value or
income will be adversely affected by a Fund's purchase of securities on such
basis.
INTEREST RATE SWAP TRANSACTIONS
The Conservative Growth and Moderate Growth Funds 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 Fund will
usually enter into interest rate swaps on a net basis, i.e., the two payment
streams are netted out, with the Fund 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 Fund. The net amount of
the excess, if any, of a Fund'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 Fund enters
into interest rate swaps on other than a net basis, the amount segregated will
be the full amount of a Fund's obligations, if any, with respect to such
interest rate swaps, accrued on a daily basis. The Funds 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 Fund 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 Fund would diminish compared to what it would have been if this
investment technique was never used.
A Fund 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
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, a Fund's risk of loss consists of the net amount of interest
payments that a Fund is contractually entitled to receive. Since interest rate
swaps are individually negotiated, a Fund expects to achieve an acceptable
degree 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 Fund 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
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<PAGE> 89
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 Fund and the
counterparty have provided for the Fund, at the Fund's election, to unwind the
over-the-counter option. The exercise of such an option ordinarily would involve
the payment by the Fund of an amount designated to effect the counterparty's
economic loss from an early termination, but does allow the Fund to treat the
assets used as "cover" as "liquid."
SEGREGATED ASSETS
When a Fund 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.
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<PAGE> 90
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 Fund's outstanding voting securities. The term "majority of the
outstanding voting securities" of either the Trust or a particular Fund 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 Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of the Trust or such Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Trust or such Fund.
A Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or 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 Fund's net assets would be (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks 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 Fund'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
Fund 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.
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 Fund 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 Fund's total assets.
For purposes of this limitation on securities lending, the value of a Fund'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 Fund's outstanding voting securities.
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<PAGE> 91
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that any Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
As a matter of non-fundamental operating policy, a Fund will not purchase
rights if as a result the Fund 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 (71) 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 (59) 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.
Thomas T. Mooney (56) 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.
</TABLE>
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<PAGE> 92
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
--------------- ------------- ----------------------
<S> <C> <C>
*Richard A. Redeker (55) 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 (39) 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 (52) 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.
Stephen M. Ungerman (45) 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.
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<PAGE> 93
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 Fund. 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
Funds.
MANAGER AND ADVISERS
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 $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
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<PAGE> 94
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 Fund to PIFM pursuant to the Management Agreement, and the amount
of such fees to be retained by PIFM, each expressed as a percentage of the
Portfolio's average daily net assets:
<TABLE>
<CAPTION>
TOTAL
PORTFOLIO MANAGEMENT FEE
--------- --------------
<S> <C>
Conservative Growth Fund.................................... .75%
Moderate Growth Fund........................................ .75%
High Growth Fund............................................ .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").
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.
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<PAGE> 95
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 26, 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 a Fund in accordance with the Fund's stated
investment objectives and policies, makes investment decisions for that Fund
segment and places orders to purchase and sell securities on behalf of that Fund
segment.
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 26, 1998 and
were approved by the sole shareholder of the Trust on September , 1998 for all
of the Funds.
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
affirmatively to give the Trust this ongoing authority. With Board approval, the
Manager is permitted to replace Advisers or employ additional Advisers for the
Funds, change the terms of the Funds' 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
Fund continue to have the right to terminate an Advisory Agreement for the Fund
at any time by a vote of the majority of the outstanding voting securities of
the Fund. Shareholders will be notified of any Adviser changes or other material
amendments to Advisory Agreements that occur under these arrangements.
The Manager pays the Advisers the fees set forth in the Prospectus for
their services with respect to each Fund. The Advisers perform all
administrative functions associated with serving as Adviser to a Fund. 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
Fund segment in accordance with the Fund's stated investment objective and
policies, making investment decisions for that Fund segment, placing orders to
purchase and sell securities on behalf of that Fund segment, and performing
various administrative duties.
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 Funds' 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.
B-25
<PAGE> 96
The Class A Plan provides that (i) .25 of 1% of the average daily net
assets of the Class A shares of each Fund 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 Fund. 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 Fund 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 Fund ("asset-based
sales charge").
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 Fund 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 Fund on not more than 60 days', nor less than 30 days'
written notice to any other party to the Plan. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class, and all material
amendments are required to be approved by the Board of 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 26, 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 Fund. 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 Fund may not exceed .75 of 1%.
The 6.25% limitation applies to each Fund rather than on a per shareholder
basis. If aggregate sales charges were to exceed 6.25% of total gross sales of
any class, all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Each Adviser is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Funds, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any.
B-26
<PAGE> 97
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 Funds 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 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 Fund 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 Fund's order.
In placing orders for securities for the Funds 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 Funds. 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 Funds 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'
B-27
<PAGE> 98
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 commensurate 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 Fund 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 at the time of purchase, on a
deferred basis, or both. Class A shares are sold with a front-end sales charge.
Class B shares are subject to a contingent-deferred sales charge. Class C shares
are sold with a low front-end sales charge, but are also subject to a
contingent-deferred sales charge. Class Z shares of each Fund 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 Fund 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 FUND SHARES FOR SECURITIES
Transactions involving the issuance of a Fund'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 Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international 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 Fund are sold with a maximum front-end sales
charge of 5%, Class C shares* of each Fund are sold
B-28
<PAGE> 99
with a front-end sales charge of 1%, and Class B*, and Class Z shares are sold
at NAV. Using the NAV of each Fund at October 1, 1998, the maximum offering
price of the Funds' shares is as follows:
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE HIGH
GROWTH GROWTH GROWTH
FUND FUND FUND
------------ -------- ------
<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 Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide -- Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account
("IRA");
(d) any company controlled by the individual (a person, entity or
group that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will be
deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer
B-29
<PAGE> 100
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
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. The value of shares held directly with the Transfer Agent
and through your 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 Fund and shares of other Prudential Mutual
Funds ("Investment Letter of Intent"). Retirement and group plans may also
qualify to purchase Class A shares at 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 Funds
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
B-30
<PAGE> 101
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 Funds 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-31
<PAGE> 102
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 Fund. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at 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 Fund for shares
of certain other Prudential Mutual Funds, including one or more specified money
market funds, subject in each case to the minimum investment requirements of
such funds. Shares of such other Prudential Mutual Funds may also be exchanged
for shares of the Funds. 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 Fund may exchange their Class A shares for
shares of certain other Prudential Mutual Funds, shares of Prudential Government
Securities Trust (Short-Intermediate Term Series) and shares of the money market
funds specified below. No fee or sales load will be imposed upon the exchange.
Shareholders of money market funds who acquired such shares upon exchange of
Class A shares may use the exchange privilege only to acquire Class A shares of
the Prudential Mutual Funds participating in the exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Trust may exchange their Class B
and Class C shares of a Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the date of the initial purchase, rather than the date of the
exchange.
B-32
<PAGE> 103
Class B and Class C shares of a Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into the Fund, such shares will be
subject to the CDSC calculated without regard to the time such shares were held
in the money market fund. In order to minimize the period of time in which
shares are subject to a CDSC, shares exchanged out of the money market fund will
be exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time period
shares are held in a money market fund and "tolled" for purposes of calculating
the CDSC holding period, exchanges are deemed to have been made on the last day
of the month. Thus, if shares are exchanged into a Fund from a money market fund
during the month (and are held in the Fund at the end of the month), the entire
month will be included in the CDSC holding period. Conversely, if shares are
exchanged into a money market fund prior to the last day of the month (and are
held in the money market fund on the last day of the month), the entire month
will be excluded from the CDSC holding period. 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 Fund 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 Fund 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-33
<PAGE> 104
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 Funds.
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 INVESTMENT PLAN ("AIP")
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Funds 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 AIP 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.
B-34
<PAGE> 105
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 Fund are inadvisable because of the sales charges applicable to (i) the
purchase of Class A and Class C 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 Funds 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 Funds 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.
B-35
<PAGE> 106
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 Board of Trustees is responsible for
determining in good faith the fair value of securities of each Fund. In
accordance with procedures adopted by the Board of Trustees the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price on such exchange system on the day of valuation, or, if there
was no sale on such day, the mean between the last bid and asked prices on such
day, or at the bid price on such day in the absence of an asked price. Corporate
bonds (other than convertible debt securities) and U.S. Government securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager in
consultation with the Adviser to be over-the-counter, are valued on the basis of
valuations provided by an independent pricing agent or principal market maker
which uses information with respect to transactions in bonds, quotations from
bond dealers, agency ratings, market transactions in comparable securities and
various relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Adviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers or independent pricing agents. Options on stock and stock indices traded
on an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sales prices as of the close of trading on the
applicable commodities exchange or board of trade or, if there was no sale on
the applicable commodities exchange or board of trade on such day, at the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade. 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 Board of Trustees.
Securities or other assets for which reliable market quotations are not
readily available, or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or the Adviser (or Valuation Committee or
Board of Trustees), does not represent fair value, are valued by the Valuation
Committee or Board of Trustees in consultation with the Manager and the Adviser,
including its portfolio managers, traders and its research and credit analysts,
on the basis of the following factors: cost of the security, transactions in
comparable securities, relationships among various securities and such other
factors as may be determined by the Manager, the Adviser, Board of Trustees or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at cost, with interest accrued or discount amortized
to the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Board of Trustees not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker.
NAV is calculated separately for each class. The NAV of Class B and Class C
shares of a Fund will generally be lower than the NAV of Class A shares of the
same Fund 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 Fund will
generally be higher than the NAV of Class A, Class B or Class C shares of the
same Fund 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
B-36
<PAGE> 107
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
Each Fund will compute its net asset value at 4:15 P.M., New York time on
each day the New York Stock Exchange is open for trading except on days on which
no orders to purchase, sell or redeem Fund shares have been received or days on
which changes in the value of the Fund's 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 Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves each Fund (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 Fund (i.e., the excess of net long-term capital gains over
net short-term capital losses) to be treated as long-term capital gains of the
shareholders, regardless of how long shares in the Fund are held.
Qualification as a regulated investment company requires, among other
things, that (a) each Fund 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 Fund diversify its
holdings so that, at the end of each fiscal quarter, (i) 50% of the value of the
Fund's assets is represented by cash, U.S. Government securities and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities); and (c) each Fund distribute to its shareholders at least 90% of
its net investment income and net short-term gains (i.e., the excess of net
short-term capital gains over net long-term capital losses) in each year.
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 Fund's income is derived from certain dividends received
from domestic corporations, a portion of the dividends paid to corporate
shareholders of the Fund 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 Fund 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 Fund of the Trust. A 4%
nondeductible excise tax will be imposed on a Fund of the Trust to the extent a
Fund 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 Fund 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 Fund and therefore is subject to the
B-37
<PAGE> 108
distribution requirements of the Internal Revenue Code. Because the original
issue discount income earned by the Fund in a taxable year may not be
represented by cash income, the Fund may have to dispose of other securities and
use the proceeds to make distributions to satisfy the Internal Revenue Code's
distribution requirements.
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 Fund 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 Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on 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 Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gain. If Section 988 losses exceed other investment company taxable
income during a taxable year, distributions made by the Fund 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 Fund 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 Fund's assets to be invested in various
countries is not known. It is not anticipated that any Fund will qualify to
pass-through to the shareholders the ability to claim as a foreign tax credit
the foreign taxes paid by a Fund.
BACKUP WITHHOLDING
With limited exceptions, each Fund 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 Fund 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 Fund's investments in
PFICs are subject to special tax provisions that may result in the taxation of
certain gains realized and unrealized by the Fund.
B-38
<PAGE> 109
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 Funds 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 Funds or their
shareholders, and the discussions here and in the Prospectus are not intended as
a substitute for careful tax planning. 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 Fund. 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.
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).
</TABLE>
AGGREGATE TOTAL RETURN
The Trust may from time to time advertise the aggregate total return of a
Fund. A Fund's aggregate total return figures represent the cumulative change in
the value of an investment in the Fund 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.
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.
</TABLE>
Comparative performance information may be used from time to time in
advertising or marketing the Funds' 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
share-
B-39
<PAGE> 110
holder 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.
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.
B-40
<PAGE> 111
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL DIVERSIFIED FUNDS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of Prudential Diversified Funds:
In our opinion, the accompanying statements of assets and liabilities present
fairly, in all material respects, the financial position of Prudential
Diversified Conservative Growth Fund, Prudential Diversified Moderate Growth
Fund and Prudential Diversified High Growth Fund (the three funds constituting
Prudential Diversified Funds, collectively referred to hereafter as the "Trust")
at September 2, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Trust's
management, our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 8, 1998
B-41
- --------------------------------------------------------------------------------
<PAGE> 112
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
STATEMENT OF ASSETS AND LIABILITIES CONSERVATIVE GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 2, 1998
-----------------
<S> <C>
ASSETS
Cash........................................................ $ 30,000
Deferred offering costs..................................... 98,000
Receivable from manager..................................... 6,500
--------
Total assets.............................................. 134,500
--------
LIABILITIES
Offering costs payable...................................... 98,000
Organizational expenses payable............................. 6,500
--------
Total liabilities......................................... 104,500
--------
NET ASSETS
Applicable to 3,000 shares of beneficial interest......... $ 30,000
========
Calculation of Offering Price
Class A:
Net asset value and redemption price per Class A share
($7,500 / 750 shares of beneficial interest issued and
outstanding)........................................... $10.00
Maximum sales charge (5% of offering price)............... .53
--------
Offering price to public.................................. $10.53
========
Class B:
Net asset value, offering price and redemption price per
Class B share ($7,500 / 750 shares of beneficial
interest issued and outstanding)....................... $10.00
========
Class C:
Net asset value and redemption price per Class C share
($7,500 / 750 shares of beneficial interest issued and
outstanding)........................................... $10.00
Maximum sales charge (1% of offering price)............... .10
--------
Offering price to public.................................. $10.10
========
Class Z:
Net asset value, offering price and redemption price per
Class Z share ($7,500 / 750 shares of beneficial
interest issued and outstanding)....................... $10.00
========
</TABLE>
B-42
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE> 113
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
STATEMENT OF ASSETS AND LIABILITIES MODERATE GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 2, 1998
-----------------
<S> <C>
ASSETS
Cash........................................................ $ 30,000
Deferred offering costs..................................... 98,000
Receivable from manager..................................... 6,500
--------
Total assets.............................................. 134,500
--------
LIABILITIES
Offering costs payable...................................... 98,000
Organizational expenses payable............................. 6,500
--------
Total liabilities......................................... 104,500
--------
NET ASSETS
Applicable to 3,000 shares of beneficial interest......... $ 30,000
========
Calculation of Offering Price
Class A:
Net asset value and redemption price per Class A share
($7,500 / 750 shares of beneficial interest issued and
outstanding)........................................... $10.00
Maximum sales charge (5% of offering price)............... .53
--------
Offering price to public.................................. $10.53
========
Class B:
Net asset value, offering price and redemption price per
Class B share ($7,500 / 750 shares of beneficial
interest issued and outstanding)....................... $10.00
========
Class C:
Net asset value and redemption price per Class C share
($7,500 / 750 shares of beneficial interest issued and
outstanding)........................................... $10.00
Maximum sales charge (1% of offering price)............... .10
--------
Offering price to public.................................. $10.10
========
Class Z:
Net asset value, offering price and redemption price per
Class Z share ($7,500 / 750 shares of beneficial
interest issued and outstanding)....................... $10.00
========
</TABLE>
B-43
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE> 114
<TABLE>
<S> <C>
PRUDENTIAL DIVERSIFIED FUNDS
PRUDENTIAL DIVERSIFIED
STATEMENT OF ASSETS AND LIABILITIES HIGH GROWTH FUND
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 2, 1998
-----------------
<S> <C>
ASSETS
Cash........................................................ $ 40,000
Deferred offering costs..................................... 98,000
Receivable from manager..................................... 6,500
--------
Total assets.............................................. 144,500
--------
LIABILITIES
Offering costs payable...................................... 98,000
Organizational expenses payable............................. 6,500
--------
Total liabilities......................................... 104,500
--------
NET ASSETS
Applicable to 4,000 shares of beneficial interest......... $ 40,000
========
Calculation of Offering Price
Class A:
Net asset value and redemption price per Class A share
($10,000 / 1,000 shares of beneficial interest issued
and outstanding)....................................... $10.00
Maximum sales charge (5% of offering price)............... .53
--------
Offering price to public.................................. $10.53
========
Class B:
Net asset value, offering price and redemption price per
Class B share ($10,000 / 1,000 shares of beneficial
interest issued and outstanding)....................... $10.00
========
Class C:
Net asset value and redemption price per Class C share
($10,000 / 1,000 shares of beneficial interest issued
and outstanding)....................................... $10.00
Maximum sales charge (1% of offering price)............... .10
--------
Offering price to public.................................. $10.10
========
Class Z:
Net asset value, offering price and redemption price per
Class Z share ($10,000 / 1,000 shares of beneficial
interest issued and outstanding)....................... $10.00
========
</TABLE>
B-44
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE> 115
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL DIVERSIFIED FUNDS
- --------------------------------------------------------------------------------
NOTE 1.
Prudential Diversified Funds (the Trust), consisting of three funds: Prudential
Diversified Conservative Growth Fund, Prudential Diversified Moderate Growth
Fund and Prudential Diversified High Growth Fund, which was organized as a
business trust in Delaware on July 29, 1998, is an open-end, diversified
management investment company. The Trust had no significant operations other
than the issuance of 750 shares each of Class A, Class B, Class C and Class Z
shares for Prudential Diversified Conservative Growth Fund and Prudential
Diversified Moderate Growth Fund, and 1,000 shares each of Class A, Class B,
Class C, and Class Z of Prudential Diversified High Growth Fund of beneficial
interest for $100,000 on September 2, 1998 to Prudential Investments Fund
Management LLC (PIFM or Manager).
Certain costs incurred and to be incurred in connection with the initial
offering of shares of the Trust, estimated at $294,000, will be deferred and
amortized funds over the period of benefit, not to exceed 12 months from the
date the funds commences operations. Estimated organizational expenses of the
Fund in the amount of approximately $19,500 incurred prior to the offering of
the Fund's shares will be reimbursed by the Manager.
- --------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Trust has entered into a management agreement with PIFM.
The management fee paid PIFM will be computed daily and payable monthly, at an
annual rate of .75 of 1% of the average daily net assets of each fund.
The Trust has entered into a distribution agreement with Prudential Investment
Management Services LLC (the Distributor or PIMS) for distribution of the fund's
shares.
Pursuant to separate Plans of Distribution (the Class A Plan, the Class B Plan
and the Class C Plan, collectively the Plans) adopted by the Trust under Rule
12b-1 of the Investment Company Act of 1940, the Distributor incurs the expenses
of distributing the fund's Class A, Class B and Class C shares. These expenses
include commissions and account servicing fees paid to, or on account of
financial advisers of Prudential Securities and Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions paid to, or on account of,
other broker-dealers or certain financial institutions which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Pursuant to the Class A Plan, each fund will compensate the Distributor for its
expenses with respect to Class A shares at an annual rate of up to .30 of 1% of
the average daily net asset value of the Class A shares. The Distributor has
agreed to limit its distribution-related fees payable under the Class A Plan to
.25 of 1% of the average daily net asset value of the Class A shares for the
fiscal period ended July 31, 1999.
Pursuant to the Class B and Class C Plans, each fund compensates 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 Class B and Class C
shares.
The Distributor incurs the expense of distributing each fund's Class Z shares
under a distribution agreement with the Trust, none of which is paid for or
reimbursed by the Fund.
Prudential Mutual Fund Services LLC, a wholly owned subsidiary of PIFM, serves
as the Trust's transfer agent.
PIFM, PIMS and Prudential Securities are indirect wholly owned subsidiaries of
The Prudential Insurance Company of America.
B-45
- --------------------------------------------------------------------------------
<PAGE> 116
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.
BB, B, CCC, CC and C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired,
I-1
<PAGE> 117
unless S&P believes that such payments will be made during such grace period.
The D rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
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.
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.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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:
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market.
A-1 -- The A-1 designation indicates that the degree of safety regarding
timely payment is very strong.
I-2
<PAGE> 118
A-2 -- Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS:
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Prime-3 -- Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime -- Issuers rated Not Prime do not fall within any of the Prime
rating categories.
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<PAGE> 119
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> 120
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> 121
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> 122
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> 123
TIME REDUCES YOUR RISK
BEST AND WORST ANNUALIZED RETURNS OF THE S&P
[BAR CHART]
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.
II-5
<PAGE> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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 with accompanying footnotes.*
(b) Report of Independent Accountants.*
(B) Exhibits:
<TABLE>
<C> <C> <S> <C>
1. (a) Certificate of Trust.**
(b) (i) Agreement and Declaration of Trust.**
(ii) Amendment No. 1 to 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) (i) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Pacific Investment Management
Company with respect to the Conservative Growth Fund.*
(ii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Pacific Investment Management
Company with respect to the Moderate Growth Fund.*
(iii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Lazard Asset Management with respect
to the Moderate Growth Fund.*
(iv) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Lazard Asset Management with respect
to the High Growth Fund.*
(v) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Dreyfus Corporation with respect
to the Conservative Growth Fund.*
(vi) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Dreyfus Corporation with respect
to the Moderate Growth Fund.*
(vii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Dreyfus Corporation with respect
to the High Growth Fund.*
(viii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Franklin Advisers, Inc with respect
to the Conservative Growth Fund.*
</TABLE>
C-1
<PAGE> 130
<TABLE>
<C> <C> <S> <C>
(ix) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Franklin Advisers, Inc with respect
to the Moderate Growth Fund.*
(x) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Franklin Advisers, Inc with respect
to the High Growth Fund.*
(xi) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Prudential Investment
Corporation with respect to the Conservative Growth Fund.*
(xii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Prudential Investment
Corporation with respect to the Moderate Growth Fund.*
(xiii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Prudential Investment
Corporation with respect to the High Growth Fund.*
(xiv) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Jennison Associates LLC with respect
to the Conservative Growth Fund.*
(xv) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Jennison Associates LLC with respect
to the Moderate Growth Fund.*
(xvi) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Jennison Associates LLC with respect
to the High Growth Fund.*
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. Form of 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. Not Applicable.
18. Rule 18f-3 Plan.**
</TABLE>
- ---------------
* Filed herewith.
** Incorporated by reference to the Registrant's initial Registration Statement
on Form N-1A, filed with the Commission on August 4, 1998 (File No.
333-60561).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of September 2, 1998 the Trust had one shareholder.
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<PAGE> 131
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.
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.
C-3
<PAGE> 132
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>
(b) Jennison Associates LLC
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Manager and Advisers" in the
Statement of Additional Information constituting Part B of this Registration
Statement.
Information as to Jennison Associates LLC's directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-5608), as most recently amended, the text of which is
incorporated herein by reference.
(c) The Prudential Investment Corporation
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Manager and Advisers" in the
Statement of Additional Information constituting Part B of this Registration
Statement.
Information as to The Prudential Investment Corporation's directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-22808), as most recently amended, the text of
which is incorporated herein by reference.
(d) Lazard Asset Management
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Manager and Advisers" in the
Statement of Additional Information constituting Part B of this Registration
Statement.
Information as to Lazard Asset Management's directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-50349), as most recently amended, the text of which is
incorporated herein by reference.
C-4
<PAGE> 133
(e) Franklin Advisers, Inc.
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Manager and Advisers" in the
Statement of Additional Information constituting Part B of this Registration
Statement.
Information as to Franklin Advisers, Inc.'s directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-26292), as most recently amended, the text of which is
incorporated herein by reference.
(f) Pacific Investment Management Company
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Manager and Advisers" in the
Statement of Additional Information constituting Part B of this Registration
Statement.
Information as to Pacific Investment Management Company's directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-48187), as most recently amended, the text of
which is incorporated herein by reference.
(g) The Dreyfus Corporation
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Manager and Advisers" in the
Statement of Additional Information constituting Part B of this Registration
Statement.
Information as to The Dreyfus Corporation's directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-8147), as most recently amended, the text of which is
incorporated herein by reference.
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 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.
C-5
<PAGE> 134
(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 Advisers" 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.
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<PAGE> 135
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 17th day of
September, 1998.
PRUDENTIAL DIVERSIFIED FUNDS
/s/ RICHARD A. REDEKER
--------------------------------------
Richard A. Redeker, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EUGENE C. DORSEY Trustee September 17, 1998
- ---------------------------------------------------
Eugene C. Dorsey
/s/ DOUGLAS H. MCCORKINDALE Trustee September 17, 1998
- ---------------------------------------------------
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY Trustee September 17, 1998
- ---------------------------------------------------
Thomas T. Mooney
/s/ RICHARD A. REDEKER President and Trustee September 17, 1998
- ---------------------------------------------------
Richard A. Redeker
/s/ GRACE C. TORRES Treasurer and Principal September 17, 1998
- --------------------------------------------------- Financial and Accounting
Grace C. Torres Officer
</TABLE>
C-7
<PAGE> 136
EXHIBIT INDEX
<TABLE>
<C> <S> <C> <C>
1. (b) (ii) Amendment No. 1 to Agreement and Declaration of Trust.
5. (b) (i) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Pacific Investment Management
Company with respect to the Conservative Growth Fund.
(ii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Pacific Investment Management
Company with respect to the Moderate Growth Fund.
(iii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Lazard Asset Management with respect
to the Moderate Growth Fund.
(iv) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Lazard Asset Management with respect
to the High Growth Fund.
(v) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Dreyfus Corporation with respect
to the Conservative Growth Fund.
(vi) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Dreyfus Corporation with respect
to the Moderate Growth Fund.
(vii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Dreyfus Corporation with respect
to the High Growth Fund.
(viii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Franklin Advisers, Inc with respect
to the Conservative Growth Fund.
(ix) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Franklin Advisers, Inc with respect
to the Moderate Growth Fund.
(x) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Franklin Advisers, Inc with respect
to the High Growth Fund.
(xi) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Prudential Investment
Corporation with respect to the Conservative Growth Fund.
(xii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Prudential Investment
Corporation with respect to the Moderate Growth Fund.
(xiii) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and The Prudential Investment
Corporation with respect to the High Growth Fund.
(xiv) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Jennison Associates LLC with respect
to the Conservative Growth Fund.
(xv) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Jennison Associates LLC with respect
to the Moderate Growth Fund.
(xvi) Form of Subadvisory Agreement between Prudential Investments
Fund Management LLC and Jennison Associates LLC with respect
to the High Growth Fund.
11. Consent of Independent Accountants.
13. Form of Purchase Agreement.
</TABLE>
<PAGE> 1
Exhibit 1(b)(ii)
AMENDMENT NO. 1
TO
AGREEMENT AND DECLARATION OF TRUST
OF
PRUDENTIAL DIVERSIFIED SERIES
This Amendment No. 1 to the Agreement and Declaration of Trust (the
"Declaration of Trust") of Prudential Diversified Series (the "Trust") is being
executed as of August 26, 1998, for the purpose of changing the name of the
Trust as reflected in Article I of the Declaration of Trust.
NOW, THEREFORE, the undersigned do hereby direct that the Declaration of
Trust be amended as follows:
1. Section 1 of Article I of the Declaration of Trust is hereby amended by
substituting the name "Prudential Diversified Funds" for the name "Prudential
Diversified Series".
2. This Amendment No. 1 to the Declaration of Trust shall become
effective immediately.
3. Except as amended pursuant to the foregoing paragraphs, the
Declaration of Trust is hereby ratified and confirmed in all respects.
IN WITNESS WHEREOF, the undersigned, being Trustees of the Trust, have
duly executed this Amendment No. 1 to the Declaration of Trust as of the day
and year first above written.
/s/ David F. Connor
------------------------
David F. Connor
/s/ Robert C. Rosselot
------------------------
Robert C. Rosselot
/s/ S. Jane Rose
------------------------
S. Jane Rose
<PAGE> 1
5 (bi)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Conservative Growth 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 Pacific Investment Management Company (the Adviser), a
company organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Conservative Growth 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 Agreement and
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, as amended, and all other
applicable federal and state laws and regulations.
2
<PAGE> 3
(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 (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
3
<PAGE> 4
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, 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 (the 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
4
<PAGE> 5
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.
(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
5
<PAGE> 6
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 .25 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 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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-------------------------
PACIFIC INVESTMENT MANAGEMENT COMPANY
By
-------------------------
8
<PAGE> 1
5 (bii)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Moderate Growth 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 Pacific Investment Management Company (the Adviser), a
company organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Moderate Growth 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 Agreement and
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, as amended, and all other
applicable federal and state laws and regulations.
2
<PAGE> 3
(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 (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
3
<PAGE> 4
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, 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 (the 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
4
<PAGE> 5
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.
(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
5
<PAGE> 6
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 .25 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 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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-----------------------------
PACIFIC INVESTMENT MANAGEMENT COMPANY
By
-----------------------------
8
<PAGE> 1
5 (biii)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Moderate Growth 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 Lazard Asset Management (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Moderate Growth 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 Agreement and
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, as amended, and all other
applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and commodities or
other assets to
2
<PAGE> 3
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 (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
3
<PAGE> 4
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, 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 (the 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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
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 .40 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 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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-----------------------------
LAZARD ASSET MANAGEMENT
By
-----------------------------
8
<PAGE> 1
5 (biv)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified High Growth 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 Lazard Asset Management (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified High Growth 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 Agreement and
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, as amended, and all other
applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and commodities or
other assets to
2
<PAGE> 3
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 (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
3
<PAGE> 4
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, 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 (the 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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
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 .40 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 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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
------------------------------
LAZARD ASSET MANAGEMENT
By
-------------------------------
8
<PAGE> 1
5(bv)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Conservative Growth 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 Dreyfus Corporation (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Conservative Growth 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 Agreement and
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, as amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and commodities or other
assets to
2
<PAGE> 3
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 (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
3
<PAGE> 4
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, 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 (the 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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
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 .45 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 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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-------------------------
THE DREYFUS CORPORATION
By
-------------------------
8
<PAGE> 1
5(bvi)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Moderate Growth 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 Dreyfus Corporation (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Moderate Growth 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 Agreement and
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, as amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and commodities or other
assets to
2
<PAGE> 3
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 (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
3
<PAGE> 4
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, 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 (the 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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
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 .45 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 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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
---------------------------
THE DREYFUS CORPORATION
By
---------------------------
8
<PAGE> 1
5(bvii)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified High Growth 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 Dreyfus Corporation (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified High Growth 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 Agreement and
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, as amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and commodities or other
assets to
2
<PAGE> 3
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 (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
3
<PAGE> 4
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, 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 (the 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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
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 .45 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 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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
---------------------------
THE DREYFUS CORPORATION
By
---------------------------
8
<PAGE> 1
5(bviii)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Conservative Growth 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 Franklin Advisers, Inc. (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the
Management Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Conservative Growth 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
Agreement and 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, as
amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and
commodities or other assets to
2
<PAGE> 3
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 (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
3
<PAGE> 4
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, 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 (the
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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
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 .50 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 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
6
<PAGE> 7
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 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 and its affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-------------------------------------
FRANKLIN ADVISERS, INC.
By
-------------------------------------
8
<PAGE> 1
5(bix)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Moderate Growth 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 Franklin Advisers, Inc. (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the
Management Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Moderate Growth 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
Agreement and 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, as
amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and
commodities or other assets to
2
<PAGE> 3
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 (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
3
<PAGE> 4
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, 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 (the
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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
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 .50 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 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
6
<PAGE> 7
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 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 and its affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
---------------------------------
FRANKLIN ADVISERS, INC.
By
---------------------------------
8
<PAGE> 1
5(bx)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified High Growth 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 Franklin Advisers, Inc. (the Adviser), a company
organized under the laws of _____________.
WHEREAS, PIFM has entered into a management agreement (the
Management Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified High Growth 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
Agreement and 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, as
amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and
commodities or other assets to
2
<PAGE> 3
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 (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
3
<PAGE> 4
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, 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 (the
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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
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 .50 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 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
6
<PAGE> 7
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 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 and its affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-------------------------------------
FRANKLIN ADVISERS, INC.
By
-------------------------------------
8
<PAGE> 1
5(bxi)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Conservative Growth 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, The Prudential Investment Corporation. (the Adviser), a
company organized under the laws of New Jersey.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Conservative Growth 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 Agreement and
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, as amended, and all other
applicable federal and state laws and regulations.
2
<PAGE> 3
(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 (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
3
<PAGE> 4
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, 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 (the 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
4
<PAGE> 5
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.
(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
5
<PAGE> 6
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 reimburse the Adviser for reasonable costs and
expenses incurred by the Adviser determined in a manner acceptable to the
Manager in furnishing the services described in Paragraph 1 hereof.
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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-------------------------
THE PRUDENTIAL INVESTMENT CORPORATION
By
-------------------------
8
<PAGE> 1
5(bxii)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Moderate Growth 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, The Prudential Investment Corporation. (the Adviser), a
company organized under the laws of New Jersey.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified Moderate Growth 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 Agreement and
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, as amended, and all other
applicable federal and state laws and regulations.
2
<PAGE> 3
(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 (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 3
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
3
<PAGE> 4
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, 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 (the 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
4
<PAGE> 5
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.
(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
5
<PAGE> 6
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 reimburse the Adviser for reasonable costs and
expenses incurred by the Adviser determined in a manner acceptable to the
Manager in furnishing the services described in Paragraph 1 hereof.
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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-------------------------
THE PRUDENTIAL INVESTMENT CORPORATION
By
-------------------------
8
<PAGE> 1
5(bxiii)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified High Growth 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, The Prudential Investment Corporation. (the Adviser), a
company organized under the laws of New Jersey.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Prudential Diversified Portfolios (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
Prudential Diversified High Growth 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 Agreement and
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, as amended, and all other
applicable federal and state laws and regulations.
2
<PAGE> 3
(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 (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
3
<PAGE> 4
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, 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 (the 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
4
<PAGE> 5
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.
(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
5
<PAGE> 6
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 reimburse the Adviser for reasonable costs and
expenses incurred by the Adviser determined in a manner acceptable to the
Manager in furnishing the services described in Paragraph 1 hereof.
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
6
<PAGE> 7
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 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 and its
affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-------------------------
THE PRUDENTIAL INVESTMENT CORPORATION
By
-------------------------
8
<PAGE> 1
5(bxiv)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Conservative Growth 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 Jennison Associates LLC (the Adviser), a company
organized under the laws of New York.
WHEREAS, PIFM has entered into a management agreement (the
Management Agreement) with Prudential Diversified Portfolios (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 Prudential Diversified Conservative Growth 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 Agreement and 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, as amended, and all other applicable federal and state
laws and regulations.
(iii) The Adviser shall determine the securities and
commodities or other assets to
2
<PAGE> 3
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
(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
3
<PAGE> 4
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, 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
(the 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.
4
<PAGE> 5
(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.
(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.
(c) 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
5
<PAGE> 6
performance of its duties under this Agreement.
3. For the services provided in this Agreement, the
Manager will pay to the Adviser as full compensation a fee at the annual rate
of .30 of 1% of the average daily net assets of the portion of the Portfolio
managed by the Adviser with respect to the first $300 million, and .25 of 1%
with respect to the average daily net assets of the Portfolio managed by the
Adviser in excess of $300 million. This fee will be computed daily and paid to
the Adviser 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
6
<PAGE> 7
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 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 and its affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
----------------------------------------
JENNISON ASSOCIATES LLC
By
----------------------------------------
8
<PAGE> 1
5(bxv)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified Moderate Growth 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 Jennison Associates LLC (the Adviser), a company
organized under the laws of New York.
WHEREAS, PIFM has entered into a management agreement (the
Management Agreement) with Prudential Diversified Portfolios (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 Prudential Diversified Moderate Growth 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 Agreement and 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, as amended, and all other applicable federal and state
laws and regulations.
(iii) The Adviser shall determine the securities and
commodities or other assets to
2
<PAGE> 3
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
(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
3
<PAGE> 4
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, 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
(the 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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
performance of its duties under this Agreement.
3. For the services provided in this Agreement, the
Manager will pay to the Adviser as full compensation a fee at the annual rate
of .30 of 1% of the average daily net assets of the portion of the Portfolio
managed by the Adviser with respect to the first $300 million, and .25 of 1%
with respect to the average daily net assets of the Portfolio managed by the
Adviser in excess of $300 million. This fee will be computed daily and paid to
the Adviser 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
6
<PAGE> 7
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 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 and its affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
----------------------------------------------
JENNISON ASSOCIATES LLC
By
---------------------------------------------
8
<PAGE> 1
5(bxvi)
PRUDENTIAL DIVERSIFIED PORTFOLIOS
(Prudential Diversified High Growth 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 Jennison Associates LLC (the Adviser), a company
organized under the laws of New York.
WHEREAS, PIFM has entered into a management agreement (the
Management Agreement) with Prudential Diversified Portfolios (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 Prudential Diversified High Growth 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 Agreement and 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, as amended, and all other applicable federal and state
laws and regulations.
(iii) The Adviser shall determine the securities and
commodities or other assets to
2
<PAGE> 3
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
(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
3
<PAGE> 4
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, 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
(the 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.
4
<PAGE> 5
(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.
(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
5
<PAGE> 6
performance of its duties under this Agreement.
3. For the services provided in this Agreement, the
Manager will pay to the Adviser as full compensation a fee at the annual rate
of .30 of 1% of the average daily net assets of the portion of the Portfolio
managed by the Adviser with respect to the first $300 million, and .25 of 1%
with respect to the average daily net assets of the Portfolio managed by the
Adviser in excess of $300 million. This fee will be computed daily and paid to
the Adviser 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
6
<PAGE> 7
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 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 and its affiliates) 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.
7
<PAGE> 8
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By
-----------------------------------------------
JENNISON ASSOCIATES LLC
By
-----------------------------------------------
8
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
September 8, 1998, relating to the statements of assets and liabilities of
Prudential Diversified Conservative Growth Fund, Prudential Diversified
Moderate Growth Fund and Prudential Diversified High Growth Fund (the three
funds constituting Prudential Diversified Funds), which appear in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this registration
statement. We also consent to the reference to us under the heading "Custodian,
Transfer and Dividend Disbursing Agent and Independent Accountants" in such
Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 16, 1998
<PAGE> 1
Exhibit 13
PURCHASE AGREEMENT
Prudential Diversified Funds (the Trust), a Delaware business trust
registered as an open-end, diversified management investment company, and
Prudential Investments Fund Management LLC, a New York limited liability
company (PIFM), intending to be legally bound, hereby agree as follows:
1. In order to provide the Trust with its initial capital, the Trust
hereby sells to PIFM, and PIFM hereby purchases, (i) 750 shares of beneficial
interest of each of Class A, Class B, Class C and Class Z of the Prudential
Diversified Conservative Growth Fund; (ii) 750 shares of beneficial interest of
each of Class A, Class B, Class C and Class Z of the Prudential Diversified
Moderate Growth Fund; and (iii) 1,000 shares of beneficial interest of each of
Class A, Class B, Class C and Class Z of the Prudential Diversified High Growth
Fund (collectively with the shares referenced in (i) and (ii) above, the
"Shares"), in each case at the net asset value per share of $10.00. The Trust
hereby acknowledges receipt from PIFM of funds in the amount of $100,000 in
full payment for the Shares.
2. PIFM represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to distribution thereof
and that PIFM has no present intention to redeem and dispose of any of the
Shares.
3. PIFM hereby agrees that it will not redeem any of the Shares except in
direct proportion to the amortization of organizational expenses by the Trust.
In the event that the Trust liquidates before deferred organizational expenses
are fully amortized, then the Shares shall bear their proportionate share of
such unamortized organizational expenses.
IN WITNESS THEREOF, the parties have executed this agreement as of the
___ th day of ___________, 199_.
Prudential Diversified Funds
By ______________________________
Prudential Investments Fund Management LLC
By ______________________________
