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PRUDENTIAL EQUITY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 1, 1996
Prudential Equity Fund, Inc. (the Fund), is an open-end, diversified
management investment company whose investment objective is long-term growth of
capital. The Fund will seek to achieve this objective by investing primarily in
common stocks of major, established corporations which, in the opinion of its
investment adviser, are believed to be in sound financial condition and to have
prospects of price appreciation greater than broadly based stock indices. The
Fund's purchase and sale of put and call options and related short-term trading
may result in a high portfolio turnover rate. These activities may be considered
speculative and may result in higher risks and costs to the Fund. The Fund may
buy and sell certain derivatives, including options on stock and stock indices
and futures for the purpose of hedging its securities portfolio pursuant to
limits described herein. There can be no assurance that the Fund's investment
objective will be achieved. See "Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated March 1, 1996, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
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CROSS- REFERENCE
TO PAGE IN
PAGE PROSPECTUS
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General Information and History.................................. B-2 20
Investment Objective and Policies................................ B-2 8
Investment Restrictions.......................................... B-10 15
Directors and Officers........................................... B-12 15
Manager.......................................................... B-16 15
Distributor...................................................... B-18 16
Portfolio Transactions and Brokerage............................. B-20 18
Purchase and Redemption of Fund Shares........................... B-22 21
Shareholder Investment Account................................... B-25 30
Net Asset Value.................................................. B-29 18
Performance Information.......................................... B-30 18
Dividends, Distributions and Taxes............................... B-32 19
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants..................................................... B-33 18
Financial Statements............................................. B-34 --
Report of Independent Accountants................................ B-45 --
Appendix I--General Investment Information....................... I-1 --
Appendix II--Historical Performance Data......................... II-1 --
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MF101B
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GENERAL INFORMATION AND HISTORY
On November 18, 1993, the shareholders of the Fund approved an amendment to
the Fund's Articles of Incorporation to change the Fund's name to Prudential
Equity Fund, Inc. from Prudential-Bache Equity Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital. The Fund
attempts to achieve such objective by investing primarily in common stocks of
major, established corporations which, in the opinion of the Fund's investment
adviser, are believed to be in sound financial condition and to have prospects
of price appreciation greater than broadly based stock indices. The Fund may
also invest in preferred stocks and bonds, which have either attached warrants
or a conversion privilege into common stocks, and in unattached warrants. There
can be no assurance that the Fund's investment objective will be achieved. See
"How the Fund Invests--Investment Objective and Policies" in the Prospectus.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDICES,
STOCK INDEX FUTURES AND OPTIONS THEREON
The Fund may purchase put options only on equity securities held in its
portfolio and write call options on stocks only if they are covered, and such
call options must remain covered so long as the Fund is obligated as a writer.
The Fund has undertaken with certain state securities commissions that, so long
as shares of the Fund are registered in those states, it will not purchase put
and call options on stock indices if, after any such purchase, the aggregate
premiums paid for such options would exceed 20% of the Fund's total net assets.
The Fund may purchase put and call options and write covered call options on
equity securities traded on securities exchanges, on NASDAQ or in the
over-the-counter market (OTC options).
The Fund may purchase and write put and call options on stock indices traded
on securities exchanges, on NASDAQ or in the over-the-counter market.
CALL OPTIONS ON STOCK. The Fund may, from time to time, write call options
on its portfolio securities. The Fund may write only call options which are
"covered," meaning that the Fund either owns the underlying security or has an
absolute and immediate right to acquire that security, without additional cash
consideration (or for additional cash consideration held in a segregated account
by its Custodian), upon conversion or exchange of other securities currently
held in its portfolio. In addition, the Fund will not permit the call to become
uncovered prior to the expiration of the option or termination through a closing
purchase transaction as described below. If the Fund writes a call option, the
purchaser of the option has the right to buy (and the Fund has the obligation to
sell) the underlying security at the exercise price throughout the term of the
option. The amount paid to the Fund by the purchaser of the option is the
"premium." The Fund's obligation to deliver the underlying security against
payment of the exercise price would terminate either upon expiration of the
option or earlier if the Fund were to effect a "closing purchase transaction"
through the purchase of an equivalent option on an exchange. There can be no
assurance that a closing purchase transaction can be effected.
The Fund would not be able to effect a closing purchase transaction after it
had received notice of exercise. In order to write a call option, the Fund is
required to comply with the rules of The Options Clearing Corporation and the
various exchanges with respect to collateral requirements. The Fund may not
purchase call options on individual stocks except in connection with a closing
purchase transaction. It is possible that the cost of effecting a closing
purchase transaction may be greater than the premium received by the Fund for
writing the option.
PUT OPTIONS ON STOCK. The Fund may also purchase put and call options. If
the Fund purchases a put option, it has the option to sell a given security at a
specified price at any time during the term of the option. If the Fund purchases
a call option, it has the option to buy a security at a specified price at any
time during the term of the option.
Purchasing put options may be used as a portfolio investment strategy when
the investment adviser perceives significant short-term risk but substantial
long-term appreciation for the underlying security. The put option acts as an
insurance policy, as it protects against significant downward price movement
while it allows full participation in any upward movement. If the Fund is
holding a stock which it feels has strong fundamentals, but for some reason may
be weak in the near term, it may purchase a put on such security, thereby giving
itself the right to sell such security at a certain strike price throughout the
term of the option. Consequently, the Fund will exercise the put only if the
price of such security falls below the strike price of the put. The difference
between the put's strike price and the market price of the underlying security
on the date the Fund exercises the put, less
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transaction costs, will be the amount by which the Fund will be able to hedge
against a decline in the underlying security. If during the period of the option
the market price for the underlying security remains at or above the put's
strike price, the put will expire worthless, representing a loss of the price
the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put may be sold.
STOCK INDEX OPTIONS. Except as described below, the Fund will write call
options on indices only if on such date it holds a portfolio of stocks at least
equal to the value of the index times the multiplier times the number of
contracts. When the Fund writes a call option on a broadly based stock market
index, the Fund will segregate or put into escrow with its Custodian, or pledge
to a broker as collateral for the option, any combination of cash, cash
equivalents or "qualified securities" with a market value at the time the option
is written of not less than 100% of the current index value times the multiplier
times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, one or more "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.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the Fund will so
segregate, escrow or pledge an amount in cash, Treasury bills or other
high-grade short-term obligations equal in value to the difference. In addition,
when the Fund writes a call on an index which is in-the-money at the time the
call is written, the Fund will segregate with its Custodian or pledge to the
broker as collateral cash, U.S. Government or other high-grade short-term debt
obligations 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 securities exchange or listed on NASDAQ against which the
Fund has not written a stock call option and which has not been hedged by the
Fund by the sale of stock index futures. However, if the Fund holds a call on
the same index as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, Treasury bills or other high-grade short-term obligations in a
segregated account with its Custodian, it will not be subject to the
requirements described in this paragraph.
STOCK INDEX FUTURES. The Fund will purchase and sell stock index futures
contracts as a hedge against changes resulting from market conditions in the
values of securities which are held in the Fund's portfolio or which it intends
to purchase or when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Fund. When the Fund purchases stock
index futures contracts, an amount of cash, cash equivalents and U.S. Government
securities, equal to the market value of the futures contracts, will be
deposited in a segregated account with the Fund's Custodian and/or in a margin
account with a broker to collateralize the position and thereby insure that the
use of such futures is unleveraged.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS. In the case of options on stock
index futures, the holder of the option pays a premium and receives the right,
upon exercise of the option at a specified price during the option period, to
assume a position in a stock index futures contract (a long position if the
option is a call and a short position if the option is a put). If the option is
exercised by the holder before the last trading day during the option period,
the option writer delivers the futures position, as well as any balance in the
writer's futures margin account, which represents the amount by which the market
price of the stock index 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 stock index future. If it is exercised on the last trading day, the option
writer delivers to the option holder cash in an amount equal to the difference
between the option exercise price and the closing level of the relevant index on
the date the option expires.
LIMITATIONS ON THE PURCHASE AND SALE OF STOCK INDEX FUTURES AND OPTIONS ON
STOCK INDEX FUTURES. Under regulations of the Commodity Exchange Act, investment
companies registered under the Investment Company Act of 1940, as amended (the
Investment Company Act), are exempt from the definition of "commodity pool
operator," subject to compliance with certain conditions. The exemption is
conditioned upon the Fund's purchasing and selling futures contracts and options
thereon for BONA FIDE hedging transactions, except that the Fund may purchase
and sell futures and options thereon for any other purpose to the extent that
the aggregate initial margin and option premiums do not exceed 5% of the
liquidation value of the Fund's total assets.
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RISKS OF TRANSACTIONS IN STOCK OPTIONS. Writing of options involves the risk
that there will be no market in which to effect a closing transaction. An
exchange traded option may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
exchange traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange may exist. In such event it might not be
possible to effect closing transactions in particular exchange traded options,
with the result that the Fund would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
call options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If the Fund as a covered call option
writer is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
In the case of OTC options, it is not possible to effect a closing
transaction in the same manner as exchange traded options because a clearing
corporation is not interposed between the buyer and seller of the option. When
the Fund writes an OTC option, it generally will be able to close out the OTC
option prior to its expiration only by entering into a closing purchase
transaction with the dealer with which the Fund originally wrote the OTC option.
Any such cancellation, if agreed to, may require the Fund to pay a premium to
the counterparty. 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. Alternatively, the Fund could write an OTC call option to, in
effect, close an existing OTC call option or write an OTC put option to close
its position on an OTC put option. However, the Fund would remain exposed to
each counterparty's credit risk on the put or call until such option is
exercised or expires. There is no guarantee that the Fund will be able to write
put or call options, as the case may be, that would effectively close an
existing position. In the event of insolvency of the counterparty, the Fund may
be unable to liquidate an OTC option.
The Fund may also purchase a "protective put," I.E., a put option acquired
for the purpose of protecting a portfolio security from a decline in market
value. In exchange for the premium paid for the put option, the Fund acquires
the right to sell the underlying security at the exercise price of the put
regardless of the extent to which the underlying security declines in value. The
loss to the Fund is limited to the premium paid for, and transaction costs in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
the security underlying the put rises, the profit the Fund realizes on the sale
of the security will be reduced by the premium paid for the put option less any
amount (net of transaction costs) for which the put may be sold. Similar
principles apply to the purchase of puts on stock indices in the
over-the-counter market.
As discussed above, an OTC option is a direct contractual relationship with
another party. Consequently, in entering into OTC options, the Fund will be
exposed to the risk that the counterparty will default on, or be unable to
complete, due to bankruptcy or otherwise, its obligation on the option. In such
an event, the Fund may lose the benefit of the transaction. Consequently, the
value of an OTC option to the Fund is dependent upon the financial viability of
the counterparty. If the Fund decides to enter into transactions in OTC options,
the Subadviser will take into account the credit quality of counterparties in
order to limit the risk of default by the counterparty.
OTC options may also be illiquid securities with respect to which no
secondary market exists. The Fund may not be able to effect closing transactions
for such options. The staff of the SEC has taken the position that purchased OTC
options and the assets used as "cover" for written OTC options are illiquid
securities unless the Fund and the counterparty have provided for the Fund at
its election to unwind the OTC option. The exercise of such an option ordinarily
would involve the payment by the Fund of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the Fund
to treat the assets used as "cover" as "liquid."
RISKS OF OPTIONS ON INDICES. The Fund's purchase and sale of options on
indices will be subject to risks described above under "Risks of Transactions in
Stock Options." In addition, the distinctive characteristics of options on
indices create certain risks that are not present with stock options.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of stock prices in the stock market generally or in
an industry or market segment rather than movements in the price of a
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particular stock. Accordingly, successful use by the Fund of options on indices
would be subject to the investment adviser's ability to predict correctly
movements in the direction of the stock market generally or of a particular
industry. This requires different skills and techniques than predicting changes
in the price of individual stocks. The investment adviser currently uses such
techniques in conjunction with the management of other mutual funds.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which could
result in substantial losses to the Fund. It is the Fund's policy 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, for example, the S&P 100
or S&P 500 index option.
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the CBOE 100). Since that time a number of additional index
option contracts have been introduced including options on industry indices.
Although the markets for certain index option contracts have developed rapidly,
the markets for other index options are still relatively illiquid. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop in all index option contracts. The Fund will not
purchase or sell any index option contract unless and until, in the investment
adviser's opinion, the market for such options has developed sufficiently that
the risk in connection with these transactions is no greater than the risk in
connection with options on stocks.
SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercises of index
options are settled in cash, a call writer such as the Fund cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Fund will write call options on indices only under the
circumstances described above under "Limitations on the Purchase and Sale of
Stock Options, Options on Stock Indices, Stock Index Futures and Options
Thereon."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
portfolio. It is also possible that the index may rise when the Fund's portfolio
of stocks does not rise. If this occurred, the Fund would experience a loss on
the call which is not offset by an increase in the value of its portfolio and
might also experience a loss in its portfolio. However, because the value of a
diversified portfolio will, over time, tend to move in the same direction as the
market, movements in the value of the Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 20% of the
Fund's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its stock portfolio in order to make settlement in cash,
and the price of such stocks might decline before they can be sold. This timing
risk makes certain strategies involving more than one option substantially more
risky with index options than with stock options. For example, even if an index
call which the Fund has written is "covered" by an index call held by the Fund
with the same strike price, the Fund will bear the risk that the level of the
index may decline between the close of trading on the date the exercise notice
is filed with the clearing corporation and the close of trading on the date the
Fund exercises the call it holds or the time the Fund sells the call which in
either case would occur no earlier than the day following the day the exercise
notice was filed.
SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON INDICES. 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.
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Although the Fund may be able to minimize this risk by withholding exercise
instructions until just before the daily cutoff time or by selling rather than
exercising an option when the index level is close to the exercise price, it may
not be possible to eliminate this risk entirely because the cutoff times for
index options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK INDEX FUTURES. There are several
risks in connection with the use of options on stock index futures contracts as
a hedging device. The correlation between the price of the futures contract and
the movements in the index may not be perfect. Therefore, a correct forecast of
interest rates and other factors affecting markets for securities may still not
result in a successful hedging transaction.
Futures prices often are extremely volatile so successful use of options on
stock index futures contracts by the Fund is also subject to the ability of the
Fund's investment adviser to predict correctly movements in the direction of
markets, changes in supply and demand, interest rates, international political
and economic policies, and other factors affecting the stock market generally.
For example, if the Fund has hedged against the possibility of a decrease in an
index which would adversely affect the price of securities in its portfolio and
the price of such securities increases instead, then the Fund will lose part or
all of the benefit of the increased value of its securities because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash to meet daily variation margin requirements, it
may need to sell securities to meet such requirements at a time when it is
disadvantageous to do so. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market.
The hours of trading of options on stock index futures contracts may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.
Options on stock index futures contracts are highly leveraged and the
specific market movements of the contract underlying an option cannot be
predicted. Options on futures must be bought and sold on exchanges. Although the
exchanges provide a means of selling an option previously purchased or of
liquidating an option previously written by an offsetting purchase, there can be
no assurance that a liquid market will exist for a particular option at a
particular time. If such a market does not exist, the Fund, as the holder of an
option on futures contracts, would have to exercise the option and comply with
the margin requirements for the underlying futures contract to realize any
profit, and if the Fund were the writer of the option, its obligation would not
terminate until the option expired or the Fund was assigned an exercise notice.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Since investments in foreign companies will usually involve currencies of
foreign countries, and since the Fund may hold funds in bank deposits in foreign
currencies, the value of the assets of the Fund as measured in U.S. dollars may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. The Fund will conduct
its foreign currency exchange transactions on a spot (I.E., cash) basis at the
spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for such trades.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for a fixed
amount of dollars, for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Fund will be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
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Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. The Fund will not enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the Fund believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Fund will thereby be served.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Fund is not required
to enter into such transactions with regard to its foreign currency-denominated
securities. Furthermore, this method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities which are
unrelated to exchange rates. It simply establishes a rate of exchange which one
can achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
RISKS OF TRANSACTIONS IN OPTIONS ON FOREIGN CURRENCIES
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange or otherwise may exist. In such event it might not be
possible to effect closing transactions in particular options, with the result
that the Fund would have to exercise its options in order to realize any profits
and would incur brokerage commissions upon the exercise of call options and upon
the subsequent disposition of underlying currencies acquired through the
exercise of call options or upon
B-7
<PAGE>
the purchase of underlying currencies for the exercise of put options. If the
Fund as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
currency until the option expires or it delivers the underlying currency 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; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events might not, at
times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
The Fund intends to purchase and sell only those options which are cleared by a
clearinghouse whose facilities are considered to be adequate to handle the
volume of options transactions.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies involve the currencies of two nations and,
therefore, developments in either or both countries can affect the values of
options on foreign currencies. Risks include those described in the Prospectus
under "How the Fund Invests--Other Investments and Policies," including
government actions affecting currency valuation and the movements of currencies
from one country to another. The quantities of currency underlying option
contracts represent odd lots in a market dominated by transactions between
banks; this can mean extra transaction costs upon exercise. Options markets may
be closed while round-the-clock interbank currency markets are open, and this
can create price and rate discrepancies.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS ON FOREIGN CURRENCIES
There are several risks in connection with the use of futures contracts as a
hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the currency or group of currencies, the price of a
futures contract may move more or less than the price of the currencies being
hedged. Therefore, a correct forecast of currency rates, market trends or
international political trends by the Manager or Subadviser may still not result
in a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance that
it will be possible, at any particular time, to close a futures position. In the
event the Fund could not close a futures position and the value of such position
declined, the Fund would be required to continue to make daily cash payments of
variation margin. There is no guarantee that the price movements of the
portfolio securities denominated in foreign currencies will, in fact, correlate
with the price movements in the futures contracts and thus provide an offset to
losses on a futures contract. Currently, futures contracts are available on the
Australian Dollar, British Pound, Canadian Dollar, French Franc, Japanese Yen,
Swiss Franc, DeutscheMark and Eurodollars.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's Manager or Subadviser to predict correctly movements in
the direction of markets and other factors affecting currencies generally. For
example, if the Fund has hedged against the possibility of an increase in the
price of securities in its portfolio and price of such securities increases
instead, the Fund will lose part or all of the benefit of the increased value of
its securities because it will have offsetting losses in its futures positions.
In addition, in such situations, if the Fund has insufficient cash to meet daily
variation margin requirements, it may need to sell securities to meet such
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.
B-8
<PAGE>
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. Currently options are
available with respect to futures contracts on the Australian Dollar, British
Pound, Canadian Dollar, French Franc, Japanese Yen, Swiss Franc, DeutscheMark
and Eurodollar.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF OPTIONS ON FOREIGN CURRENCIES AND FUTURES
CONTRACTS ON FOREIGN CURRENCIES
The Fund will write put options on foreign currencies and futures contracts
on foreign currencies only if they are covered by segregating with the Fund's
Custodian an amount of cash or short-term investments equal to the aggregate
exercise price of the puts. The Fund will not (a) write puts having aggregate
exercise prices greater than 25% of total net assets; or (b) purchase (i) put
options on currencies or futures contracts on foreign currencies or (ii) call
options on foreign currencies if, after any such purchase, the aggregate
premiums paid for such options would exceed 10% of the Fund's total net assets.
The Fund intends to engage in futures contracts and options on futures
contracts as a hedge against changes 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. The Fund also intends to engage in such transactions when they
are economically appropriate for the reduction of risks inherent in the ongoing
management of the Fund.
POSITION LIMITS
Transactions by the Fund in futures contracts and options will be subject to
limitations, if any, established by each of the exchanges, boards of trade or
other trading facilities (including NASDAQ) governing the maximum number of
options in each class which may be written or purchased by a single investor or
group of investors acting in concert, regardless of whether the options are
written on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of futures contracts and options which the Fund may
write or purchase may be affected by the futures contracts and options written
or purchased by other investment advisory clients of the investment adviser. An
exchange, board of trade or other trading facility may order the liquidations of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
PORTFOLIO TURNOVER
The Fund has no fixed policy with respect to portfolio turnover; however, as
a result of the Fund's investment policies, its portfolio turnover rate may
exceed 100% although it is not expected to exceed 200%. The portfolio turnover
rate is, generally, the percentage computed by dividing the lesser of portfolio
purchases or sales by the average value of the portfolio. To the extent that the
Fund engages in short-term trading in attempting to achieve its objective, it
may increase its turnover rate and incur greater brokerage commissions and other
transaction costs, which are borne directly by the Fund. See "Portfolio
Transactions and Brokerage."
LENDING OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to broker-dealers, banks or other
recognized institutional borrowers of securities, provided that the borrower at
all times maintains cash or equivalent collateral or secures a letter of credit
in favor of the Fund equal in value to at least 100% of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the Fund an amount equivalent to any dividends or interest paid on
such securities, and the Fund may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or secured a letter of credit.
Loans are subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated
B-9
<PAGE>
portion of the interest earned on the cash or equivalent collateral to the
borrower or placing broker. The Fund does not have the right to vote securities
on loan, but would terminate the loan and regain the right to vote if that were
considered important with respect to the investment. The Fund does not intend to
lend its portfolio securities during the coming year.
ILLIQUID SECURITIES
The Fund may not hold more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (the
NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, INTER ALIA, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (E.G., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (I.E., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
B-10
<PAGE>
The Fund may not:
1. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result with respect to 75% of the
Fund's total assets, more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer.
2. Make short sales of securities except short sales against-the-box (but
the Fund may obtain such short-term credits as may be necessary for the
clearance of transactions).
3. Concentrate its investments in any one industry (no more than 25% of the
Fund's total assets will be invested in any one industry).
4. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For the purpose of this restriction,
obligations of the Fund to Directors pursuant to deferred compensation
arrangements, the purchase or sale of securities on a when-issued or delayed
delivery basis, the purchase and sale of options, futures contracts and forward
foreign currency exchange contracts and collateral arrangements with respect to
the purchase and sale of options, futures contracts, options on futures
contracts and forward foreign currency exchange contracts are not deemed to be
the issuance of a senior security or a pledge of assets.
5. Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of any one issuer.
6. Purchase any security if as a result the Fund would then have more than
5% of its total assets (taken at current value) invested in securities of
companies (including predecessors) less than three years old.
7. Buy or sell commodities or commodity contracts or real estate or
interests in real estate except that the Fund may purchase and sell stock index
futures contracts, options thereon and forward foreign currency exchange
contracts and securities which are secured by real estate and securities of
companies which invest or deal in real estate.
8. 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.
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which not more than 10% of its total assets (taken at current value)
would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the common stock of companies
which invest in or sponsor such programs.
12. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (such loans being limited to 10% of the Fund's total
assets). (The purchase of a portion of an issue of securities distributed
publicly, whether or not the purchase is made on the original issuance, is not
considered the making of a loan.)
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. Invest in oil, gas and mineral leases.
2. Purchase warrants if as a result the Fund would then have more than 5%
of its net assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange will be limited to 2% of the Fund's net assets (determined at the time
of investment). For the purpose of this limitation, warrants acquired in units
or attached to securities are deemed to be without value.
3. Invest in securities of any issuer if, to the knowledge of the Fund, any
officer or Director of the Fund or the Fund's Manager or Subadviser (as defined
below) owns more than 1/2 of 1% of the outstanding securities of such issuer,
and such officers and directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
B-11
<PAGE>
4. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
5. Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable.
6. Purchase securities on margin, except for such short-term credits as are
necessary for the clearance of purchases and sales of portfolio securities.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (71) Director President and Director of BMC Fund,
c/o Prudential Mutual Inc., a closed-end investment
Fund Management, Inc. company; previously, Vice Chairman
One Seaport Plaza of Broyhill Furniture Industries,
New York, NY Inc.; Certified Public Accountant;
Secretary and Treasurer of
Broyhill Family Foundation Inc.;
Member of the Board of Trustees of
Mars Hill College; President and
Director of The High Yield Plus
Fund, Inc. and First Financial
Fund, Inc.
Eugene C. Dorsey (69) Director Retired President, Chief Executive
c/o Prudential Mutual Officer and Trustee of the Gannett
Fund Management, Inc. Foundation (now Freedom Forum);
One Seaport Plaza former Publisher of four Gannett
New York, NY newspapers and Vice President of
Gannett Company; past Chairman,
Independent Sector (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.
Delayne Dedrick Gold Director Marketing and Management
(57) Consultant.
c/o Prudential Mutual
Fund Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. Director Senior Director (since January
(74) 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential
New York, NY Securities); formerly Interim
Chairman and Chief Executive
Officer of PMF (June-September
1993); formerly Chairman of the
Board of Prudential Securities
(1982-1985) and Chairman of the
Board and Chief Executive Officer
of Bache Group Inc. (1977-1982);
Director of The First Australia
Fund, Inc. and The First Australia
Prime Income Fund, Inc.; Trustee
of The Trudeau Institute.
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION PRINCIPAL OCCUPATIONS
AND AGE WITH FUND DURING PAST FIVE YEARS
- ------------------------------------------------------------------------
<S> <C> <C>
Thomas T. Mooney Director President of Greater Rochester Metro
(54) Chamber of Commerce; former Rochester
c/o Prudential City Manager; Trustee of Center for
Mutual Governmental Research, Inc.; Director
Fund Management, of Blue Cross of Rochester, Monroe
Inc. County Water Authority, Rochester Jobs,
One Seaport Inc., Executive Service Corps of
Plaza Rochester, Monroe County Industrial
New York, NY Development Corporation, Northeast
Midwest Institute, First Financial
Fund, Inc. and The High Yield Plus
Fund, Inc.
Thomas H. Director President, O'Brien Associates (financial
O'Brien (71) and management consultants) (since
c/o Prudential April 1984); formerly, President of
Mutual Jamaica Water Securities Corp. (holding
Fund Management, company) (February 1989-August 1990);
Inc. Director (September 1987-April 1991)
One Seaport and Chairman of the Board and Chief
Plaza Executive Officer (September
New York, NY 1987-February 1989) of Jamaica Water
Supply Company; Director of Ridgewood
Savings Bank and Yankee Energy System,
Inc.; Trustee of Hofstra University.
*Richard A. President and President, Chief Executive Officer and
Redeker (52) Director Director (since October 1993), PMF;
One Seaport Executive Vice President, Director and
Plaza Member of Operating Committee (since
New York, NY October 1993), Prudential Securities;
Director (since October 1993) of
Prudential Securities Group, Inc.
(PSG); Executive Vice President, The
Prudential Investment Corporation
(since July 1994); Director (since
January 1994) of Prudential Mutual Fund
Distributors, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc.
(PMFS); formerly Senior Executive Vice
President and Director of Kemper
Financial Services, Inc. (September
1978-September 1993) and Director of
The High Yield Income Fund, Inc.
Nancy H. Teeters Director Economist; formerly Vice President and
(65) Chief Economist (March 1986-June 1990)
c/o Prudential of International Business Machines
Mutual Corporation; Director of Inland Steel
Fund Management, Corporation (since 1991) and First
Inc. Financial Fund, Inc.
One Seaport
Plaza
New York, NY
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION PRINCIPAL OCCUPATIONS
AND AGE WITH FUND DURING PAST FIVE YEARS
- ------------------------------------------------------------------------
<S> <C> <C>
David W. Drasnin Vice President Vice President and Branch Manager of
(59) Prudential Securities.
39 Public Square
Wilkes-Barre, PA
Robert F. Gunia Vice President Chief Administrative Officer (since July
(49) 1990), Director (since January 1989)
One Seaport and Executive Vice President, Treasurer
Plaza and Chief Financial Officer (since June
New York, NY 1987) of PMF; Senior Vice President
(since March 1987) of Prudential
Securities; Executive Vice President,
Treasurer and Comptroller (since March
1991) of PMFD; Director (since June
1987) of PMFS; Vice President and
Director of The Asia Pacific Fund, Inc.
(since 1989).
S. Jane Rose Secretary Senior Vice President (since January
(50) 1991) and Senior Counsel (since June
One Seaport 1987) of PMF; Senior Vice President and
Plaza Senior Counsel (since July 1992) of
New York, NY Prudential Securities; formerly Vice
President and Associate General Counsel
of Prudential Securities.
Eugene S. Stark Treasurer and First Vice President (since January
(38) Principal 1990) of PMF.
One Seaport Financial and
Plaza Accounting
New York, NY Officer
Stephen M. Assistant First Vice President of PMF (since
Ungerman (42) Treasurer February 1993); prior thereto, Senior
One Seaport Tax Manager of Price Waterhouse
Plaza (1981-January 1993).
New York, NY
Deborah A. Docs Assistant Vice President and Associate General
(38) Secretary Counsel (since January 1993) of PMF;
One Seaport Vice President and Associate General
Plaza Counsel (since January 1993) of
New York, NY Prudential Securities; previously
Associate Vice President (January
1990-December 1992) and Assistant
General Counsel (November 1991-December
1992) of PMF.
<FN>
- ------------------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.
The Board of Directors has nominated a new slate of Directors for the Fund
which will be submitted to shareholders at a special meeting scheduled to be
held in or about October 1996.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Directors who is not an affiliated person of PMF
annual compensation of $7,500, in addition to certain out-of-pocket expenses.
Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee in installments which accrue interest at
a rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
Bills at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and becomes payable
B-14
<PAGE>
at the option of the Director. The Fund's obligation to make payments of
deferred Director's fees, together with interest thereon, is a general
obligation of the Fund. Mr. Dorsey elected to receive his Director's fee
pursuant to a deferred fee agreement with the Fund for the fiscal year ended
December 31, 1995.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1995 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's Board and the Board of any other investment
companies managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for
the calendar year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
- ----------------------------------- ----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Edward D. Beach, Director $ 7,500 None N/A $ 183,500(22/43)**
Eugene C. Dorsey, Director $ 7,500 None N/A $ 77,375*(10/34)**
Delayne Dedrick Gold, Director $ 7,500 None N/A $ 183,250(24/45)**
Thomas T. Mooney, Director $ 7,500 None N/A $ 129,625(14/19)**
Thomas H. O'Brien, Director $ 7,500 None N/A $ 44,000(6/24)**
Nancy H. Teeters, Director $ 7,500 None N/A $ 107,500(13/31)**
<FN>
* All compensation for the calendar year ended December 31, 1995 represents
deferred compensation. Aggregate compensation from the Fund for the fiscal
year ended December 31, 1995, including accrued interest, amounted to $8,516.
Aggregate compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1995, including accrued interest, amounted
to approximately $85,800.
** Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
</TABLE>
As of February 9, 1996, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of common stock of the Fund.
As of February 9, 1996, Prudential Securities was the record holder for
other beneficial owners of 28,972,065 Class A shares (or 40% of the outstanding
Class A shares), 89,122,992 Class B shares (or 67% of the outstanding Class B
shares) and 1,235,359 Class C shares (or 77% of the outstanding Class C shares)
of the Fund. In the event of any meetings of shareholders, Prudential Securities
will forward, or cause the forwarding of, proxy materials to the beneficial
owners for which it is the record holder.
B-15
<PAGE>
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund, comprise
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of January 31, 1996, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $52
billion and, according to the Investment Company Institute, as of December 31,
1995, the Prudential Mutual Funds were the 13th largest family of mutual funds
in the United States.
PMF, the Manager of the Fund, is a subsidiary of Prudential Securities
Incorporated and The Prudential Insurance Company of America (Prudential). PMF
has three wholly-owned subsidiaries: Prudential Mutual Fund Distributors, Inc.,
Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) and
Prudential Mutual Fund Investment Management, Inc. PMFS serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company (the Custodian), the Fund's custodian, and PMFS, the Fund's
transfer and dividend disbursing agent. The management services of PMF for the
Fund are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets up to and
including $500 million, .475 of 1% of the Fund's average daily net assets from
$500 million to $1 billion and .45 of 1% of the Fund's average daily net assets
in excess of $1 billion. The fee is computed daily and payable monthly. The
Management Agreement also provides that, in the event the expenses of the Fund
(including the fees of PMF, but excluding interest, taxes, brokerage
commissions, distribution fees and litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the Fund's
business) for any fiscal year exceed the lowest applicable annual expense
limitation established and enforced pursuant to the statutes or regulations of
any jurisdiction in which the Fund's shares are qualified for offer and sale,
the compensation due to PMF will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to PMF will be paid by
PMF to the Fund. No such reductions were required during the fiscal year ended
December 31, 1995. Currently, the Fund believes that the most restrictive
expense limitation of state securities commissions is 2 1/2% of the Fund's
average daily net assets up to $30 million, 2% of the next $70 million of such
assets and 1 1/2% of such assets in excess of $100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the
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<PAGE>
Securities and Exchange Commission, registering the Fund and qualifying its
shares under state securities laws, including the preparation and printing of
the Fund's registration statements and prospectuses for such purposes, (k)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act, on May 5, 1995 and by
shareholders of the Fund on April 29, 1988.
For the fiscal years ended December 31, 1995, 1994 and 1993, PMF received
management fees of $13,027,717, $10,083,085 and $8,086,967, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PIC's performance of such services. PIC is
reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services. Investment advisory services are provided to the Fund
by a unit of the Subadviser, known as Prudential Mutual Fund Investment
Management.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 5, 1995, and by shareholders of the Fund on April 29, 1988.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days' nor less than 30
days' written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
The Manager and Subadviser 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, 1994. Its primary business is to offer a full range of products and services
in three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs nearly
100,000 persons worldwide, and maintains a sales force of approximately 19,000
agents, 3,400 insurance brokers and 6,000 financial advisors. It insures or
provides other financial services to more than 50 million people worldwide.
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. For the year ended December 31, 1994,
Prudential through its subsidiaries provided financial services to more than 50
million people worldwide--the equivalent of more than one of every five people
in the United States. As of December 31, 1994, Prudential through its
subsidiaries provided automobile insurance for more than 1.8 million cars and
insured more than 1.5 million homes. For the year ended December 31, 1994, The
Prudential Bank, a subsidiary of Prudential, served 940,000 customers in 50
states providing credit card services and loans totaling more than $1.2 billion.
Assets held by Prudential Securities Incorporated (PSI) for its clients totaled
approximately $150 billion at December 31, 1994. During 1994, over 28,000 new
customer accounts were opened each month at PSI. The Prudential Real Estate
Affiliates, the fourth largest real estate brokerage network in the United
States, has more than 34,000 brokers and agents and more than 1,100 offices in
the United States.
B-17
<PAGE>
Based on data for the period from January 1, 1995 to September 30, 1995 for
the Prudential Mutual Funds, on an average day, there are approximately $80
million in common stock transactions, over $150 million in bond transactions and
over $3.1 billion in money market transactions. 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. Based on complex-wide data for
the period from January 1, 1995 to September 30, 1995, on an average day, over
7,000 shareholders telephoned PMFS, 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.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, acted as distributor of the
Class A shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), Prudential Securities (the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B and
Class C shares, respectively. Prudential Securities serves as the Distributor of
Class Z shares and incurs the expenses of distributing the Fund's Class Z shares
under a Distribution Agreement with the Fund, none of which are reimbursed by or
paid for by the Fund. See "How the Fund is Managed--Distributor" in the
Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 19, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Class A or Class B Plan or in any agreement related to either Plan (the Rule
12b-1 Directors), at a meeting called for the purpose of voting on each Plan,
adopted a new plan of distribution for the Class A shares of the Fund (the Class
A Plan) and approved an amended and restated plan of distribution with respect
to the Class B shares of the Fund (the Class B Plan). On May 6, 1993, the Board
of Directors, including a majority of the Rule 12b-1 Directors, at a meeting
called for the purpose of voting on each Plan, approved modifications to the
Fund's Class A and Class B Plans and Distribution Agreements to conform them to
recent amendments to the National Association of Securities Dealers, Inc. (NASD)
maximum sales charge rule described below. As so modified, 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 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%. As so modified, the
Class B Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class B shares may be paid as a service fee and (ii) up to .75 of 1% (not
including the service fee) of the average daily net assets of the Class B shares
(asset-based sales charge) may be used as reimbursement for distribution-related
expenses with respect to the Class B shares. On May 6, 1993, the Board of
Directors, including a majority of the Rule 12b-1 Directors, at a meeting called
for the purpose of voting on each Plan, adopted a plan of distribution for the
Class C shares of the Fund and approved further amendments to the plans of
distribution for the Fund's Class A and Class B shares changing them from
reimbursement type plans to compensation type plans. The Plans were last
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 5, 1995. The Class A Plan, as amended, was approved by Class A
and Class B shareholders, and the Class B Plan, as amended, was approved by
Class B shareholders on July 19, 1994. The Class C Plan was approved by the sole
shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended December 31, 1995, PMFD received
payments of $2,270,912 under the Class A Plan. This amount was primarily
expended for payment of account servicing fees to financial advisers and other
persons who sell Class A shares. For the fiscal year ended December 31, 1995,
PMFD also received approximately $2,251,200 in initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1995, Prudential
Securities received approximately $18,911,600 from the Fund under the Class B
Plan and spent approximately $19,922,400 in distributing the Class B shares. It
is estimated that of the latter amount, approximately 0.5% ($121,300) was spent
on printing and mailing of prospectuses to other than current
B-18
<PAGE>
shareholders; 19.8% ($3,933,900) was spent on compensation to Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, for commissions to its
representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred by it
for distribution of Class B shares; and 79.7% ($15,867,200) was spent on the
aggregate of (i) commission credits to Prudential Securities branch offices, for
payments of commissions and account servicing fees to financial advisers (43.1%
or $8,584,700) and (ii) an allocation on account of overhead and other branch
office distribution-related expenses (36.6% or $7,282,500). The term "overhead
and other branch office distribution-related expenses" represents (a) the
expenses of operating the Prudential Securities branch offices in connection
with the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) expenses of mutual fund sales coordinators to promote
the sale of Fund shares and (d) other incidental expenses relating to branch
promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended December 31, 1995, Prudential
Securities received approximately $3,461,900 in contingent deferred sales
charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1995, Prudential
Securities received $121,899 from the Fund under the Class C Plan and spent
approximately $201,000 in distributing the Fund's Class C shares. It is
estimated that of the latter amount, approximately 2.7% ($5,400) was spent on
printing and mailing of prospectuses to other than current shareholders; 9.5%
($19,100) was spent on compensation to Prusec for commissions to its
representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred by it
for distribution of Class C shares; and 87.8% ($176,500) was spent on the
aggregate of (i) commission credits to Prudential Securities branch offices, for
payments of commissions and account servicing fees to financial advisers (40.2%
or $80,800) and (ii) an allocation on account of overhead and other branch
office distribution-related expenses (47.6% or $95,700). Prudential Securities
also receives the proceeds of contingent deferred sales charges paid by
investors upon certain redemptions of Class C shares. See "Shareholder
Guide--How to Sell Your Shares--Contingent Deferred Sales Charges" in the
Prospectus. For the fiscal year ended December 31, 1995, Prudential Securities
received approximately $8,400 in contingent deferred sales charges attributable
to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
30 days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report includes 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 the Rule
12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 5, 1995. On November 3, 1995, the
Board of Directors approved the transfer of the Distribution Agreement for Class
A shares with PMFD to Prudential Securities.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the
B-19
<PAGE>
safety, potential returns and liquidity of the investments had been
misrepresented. The limited partnerships principally involved real estate, oil
and gas producing properties and aircraft leasing ventures. The SEC Order (i)
included findings that PSI's conduct violated the federal securities laws and
that an order issued by the SEC in 1986 requiring PSI to adopt, implement and
maintain certain supervisory procedures had not been complied with; (ii)
directed PSI to cease and desist from violating the federal securities laws and
imposed a $10 million civil penalty; and (iii) required PSI to adopt certain
remedial measures including the establishment of a Compliance Committee of its
Board of Directors. Pursuant to the terms of the SEC settlement, PSI established
a settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has agreed
to provide additional funds, if necessary, for that purpose. PSI's settlement
with the state securities regulators included an agreement to pay a penalty of
$500,000 per jurisdiction. PSI consented to a censure and to the payment of a
$5,000,000 fine in settling the NASD action. In settling the above referenced
matters, PSI neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of the Fund's shareholders rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, options
on such securities and stock indices and stock index futures contracts and
options thereon for the Fund, the selection of brokers, dealers and futures
commission merchants to effect the transactions and the negotiation of brokerage
commissions, if any. For purposes of this section, the term "Manager" includes
the Subadviser. Purchases and sales of securities, options and futures on an
exchange or board of trade are effected through brokers or futures commission
merchants who charge a negotiated commission for their services. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates.
In the over-the-counter market, 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
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<PAGE>
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities (or any affiliate)
acts as principal. Thus, it will not deal in over-the-counter securities with
Prudential Securities acting as market maker, and it will not execute a
negotiated trade with Prudential Securities if execution involves Prudential
Securities' acting as principal with respect to any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager will consider research and investment
services provided by brokers or dealers who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data and
research reports on particular companies and industries. Such services are used
by the Manager in connection with all of its investment activities, and some of
such services obtained in connection with the execution of transactions for the
Fund may be used in managing other investment accounts. Conversely, brokers
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than the Fund, and
the services furnished by such brokers may be used by the Manager in providing
investment management for the Fund. Commission rates are established pursuant to
negotiations with the broker based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates. The
Manager is authorized to pay higher commissions on brokerage transactions for
the Fund to brokers other than Prudential Securities in order to secure research
and investment services described above, subject to review by the Fund's Board
of Directors from time to time as to the extent and continuation of this
practice. The allocation of orders among brokers and the commission rates paid
are reviewed periodically by the Fund's Board of Directors. Portfolio securities
may not be purchased from any underwriting or selling syndicate of which
Prudential Securities (or any affiliate), during the existence of the syndicate,
is a principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the SEC. This limitation, in the opinion of the Fund,
will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities
(or any affiliate) must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers or futures commission merchants in
connection with comparable transactions involving similar securities or futures
being purchased or sold on an exchange or board of trade during a comparable
period of time. This standard would allow Prudential Securities (or any
affiliate) to receive no more than the remuneration which would be expected to
be received by an unaffiliated broker or futures commission merchant in a
commensurate arms-length transaction. Furthermore, the Board of Directors of the
Fund, including a majority of the non-interested Directors, has adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consistent with the foregoing standard. In accordance with Section 11(a) of the
Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Section 11(a) provides that Prudential Securities must furnish to
the Fund at least annually a statement setting forth the total amount of all
compensation retained by Prudential Securities from transactions effected for
the Fund during the applicable period. Brokerage and futures transactions with
Prudential Securities (or any affiliate) are also subject to such fiduciary
standards as may be imposed upon Prudential Securities (or such affiliate) by
applicable law.
The table presented below shows certain information regarding the payment of
commissions by the Fund, including the amount of such commissions paid to
Prudential Securities, for the three-year period ended December 31, 1995.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------
ITEM 1995 1994 1993
- ---------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $ 1,523,386 $ 1,314,799 $1,616,768
Total brokerage commissions paid to
Prudential Securities.................. 82,445 102,378 351,201
Percentage of total brokerage
commissions paid to Prudential
Securities............................. 5.4% 7.8% 21.7%
</TABLE>
B-21
<PAGE>
The Fund effected approximately 5.4% of the total dollar amount of its
transactions involving the payment of commissions through Prudential Securities
during the year ended December 31, 1995. Of the total brokerage commissions paid
during that period, $1,199,234 (or 78.7%) were paid to firms which provided
research, statistical or other services to the Manager. PMF has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares of the Fund
are not subject to any sales or redemption charge and are offered exclusively
for sale to participants in the Prudential Securities 401(k) Plan, an employee
benefit plan sponsored by Prudential Securities (the PSI 401(k) Plan). See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
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 participants in the
PSI 401(k) Plan. See "Distributor" and "Shareholder Investment Account--Exchange
Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 5%
and Class B*, Class C* and Class Z** shares of the Fund are sold at net asset
value. Using the Fund's net asset value at December 31, 1995, the maximum
offering price of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share................ $ 16.44
Maximum sales charge (5% of offering price)........................... .87
--------
Maximum offering price to public...................................... $ 17.31
--------
--------
CLASS B
Net asset value, offering price and redemption price per Class B
share*............................................................... $ 16.43
--------
--------
CLASS C
Net asset value, offering price and redemption price per Class C
share*............................................................... $ 16.43
--------
--------
CLASS Z
Net asset value, offering price and redemption price per Class Z
share**.............................................................. $ 16.44
--------
--------
</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.
** Class Z shares did not exist at December 31, 1995.
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 the 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-22
<PAGE>
(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.
Also, an eligible group of related Fund investors may include an employer
(or group of related employers) and one or more qualified retirement plans of
such employer or employers (an employer controlling, controlled by or under
common control with another employer is deemed related to that employer).
In addition, an eligible group of related Fund investors may include (i) a
client of a Prudential Securities financial adviser who gives such financial
adviser discretion to purchase the Prudential Mutual Funds for his or her
account only in connection with participation in a market timing program and for
which program Prudential Securities receives a separate advisory fee or (ii) a
client of an unaffiliated registered investment adviser which is a client of a
Prudential Securities financial adviser, if such unaffiliated adviser has
discretion to purchase the Prudential Mutual Funds for the accounts of his or
her customers but only if the client of such unaffiliated adviser participates
in a market timing program conducted by such unaffiliated adviser; provided such
accounts in the aggregate have assets of at least $15 million invested in the
Prudential Mutual Funds.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. 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 the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
Accumulation are not available to individual participants in any retirement or
group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds. All shares of the Fund and shares of other Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) which were previously purchased and are still owned are also included
in determining the applicable reduction. However, the value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held either
directly with the Transfer Agent or through Prudential Securities. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser, except in the case of retirement and group plans where
B-23
<PAGE>
the employer or plan sponsor will be responsible for paying any applicable sales
charge. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal, except in the case of retirement and group plans.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser (or the employer or
plan sponsor in the case of any retirement or group plan) is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability--An individual will be 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 must also indicate the date of disability.
indefinite 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 1/2 and is taking
a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the
excess and whether or not taxes have been
paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
B-24
<PAGE>
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
-------------------------------------
YEAR SINCE PURCHASE $500,001 TO $1
PAYMENT MADE MILLION OVER $1 MILLION
- --------------------------------------------- ----------------- -----------------
<S> <C> <C>
First........................................ 3.0% 2.0%
Second....................................... 2.0% 1.0%
Third........................................ 1.0% 0%
Fourth and thereafter........................ 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If delivery of 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 Shareholder Investment
Account at any time. The Fund makes available to the shareholders the following
privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than 5 full business days
prior to the record date to have subsequent dividends and/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 distribution
at net asset value by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the net
asset value per share next determined after receipt of the check or proceeds by
the Transfer Agent. A shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
Exchange Privilege is available for those funds eligible for investment in this
particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
B-25
<PAGE>
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A 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 Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., a money market fund. No CDSC will be payable upon such exchange of Class B
shares, but a CDSC may be payable upon the redemption of the Class B and Class C
shares acquired as a result of an exchange. The applicable sales charge will be
that imposed by the fund in which shares were initially purchased and the
purchase date will be deemed to be the first day of the month after the initial
purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special 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 by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven-year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
B-26
<PAGE>
CLASS Z. Class Z shares may be exchanged for Class Z shares of the funds
listed below which participate in the PSI 401(k) Plan. No fee or sales load will
be imposed upon the exchange.
Prudential Allocation Fund
(Balanced Portfolio)
Prudential Equity Income Fund
Prudential Global Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
(Money Market Series)
Prudential Growth Opportunity Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential Jennison Fund, Inc.
(expected to be available later in 1996)
Prudential MoneyMart Assets, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Utility Fund, Inc.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
25 Years................. $ 110 $ 165 $ 220 $ 275
20 Years................. 176 264 352 440
15 Years................. 296 444 592 740
10 Years................. 555 833 1,110 1,388
5 Years................. 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
</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 Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
B-27
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of the
shares in the shareholder's account. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide-- How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not generally be considered as dividends, yield
or income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. Withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan, particularly if used in connection with a
retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) Plan,
self-directed individual retirement accounts and "tax 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, their 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.
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
B-28
<PAGE>
personal savings account with those in an IRA, assuming a $2,000 annual
contribution, and 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 Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in the IRA account will be subject to tax when withdrawn from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter promoted 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 Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with the procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service or principal market marker. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued on the basis of
valuations provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
markers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of the commodities exchange or board of trade. Quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the current rate obtained from a recognized bank or dealer and
forward currency exchange contracts are valued at the current cost of covering
or offsetting such contacts. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on which
a portfolio security is traded, such security will be valued at fair value
considering factors determined in good faith by the investment adviser under
procedures established by and under the general supervision of the Fund's Board
of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to
B-29
<PAGE>
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. The Fund will compute its net asset value at 4:15 P.M.,
New York time, on each day the New York Stock Exchange is open for trading
except on days on which no orders to purchase, sell or redeem Fund shares have
been received or days on which changes in the value of the Fund's portfolio
securities do not affect net asset value. In the event the New York Stock
Exchange closes early on any business day, the net asset value of the Fund's
shares shall be determined at the time between such closing and 4:15 P.M., New
York time.
Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A shares as a result of the larger distribution-related fee to which
Class B and Class C shares are subject. The NAV of Class Z shares will generally
be higher than the NAV of Class A, Class B or Class C shares as a result of the
fact that the Class Z shares are not subject to any distribution or service fee.
It is expected, however, that the NAV of the four classes will tend to converge
immediately after the recording of dividends, which will differ by approximately
the amount of the distribution-related expense accrual differential among the
classes.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total returns for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended December 31, 1995 were
25.0%, 17.2% and 14.6%, respectively. The average annual total returns for Class
B shares of the Fund for the one, five and ten year periods ended on December
31, 1995 were 25.6%, 17.4% and 14.1%, respectively. The average annual total
returns for Class C shares for the one year and since inception (August 1, 1994)
periods ended December 31, 1995 were 29.6% and 20.9%, respectively. During these
periods, no Class Z shares were outstanding.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
T = -------
P
Where: P = a hypothetical initial payment of $1000.
T = aggregate total return.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the 1, 5 or 10 year
periods.
Aggregate total return does not take into account any applicable initial or
contingent deferred sales charges or federal or state income taxes that may be
payable upon redemption or any applicable initial or contingent deferred sales
charges.
The aggregate total returns for Class A shares for the one year, five year
and since inception (January 22, 1990) periods ended on December 31, 1995 were
31.6%, 132.9% and 136.1%, respectively. The aggregate total returns for Class B
shares for
B-30
<PAGE>
the one, five and ten year periods ended on December 31, 1995 were 30.6%, 123.9%
and 274.4%, respectively. The aggregate total returns for Class C shares for the
one year and since inception (August 1, 1994) periods ended December 31, 1995
were 30.6% and 20.9%, respectively. During these periods, no Class Z shares were
outstanding.
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period. The yields for the Class A, Class B and Class C shares for the
30-day period ended December 31, 1995 were 1.74%, 1.09% and 1.09%, respectively.
During this period, no Class Z shares were outstanding.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
[CHART]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN
<S> <C> <C>
Common Stocks 10.2%
Long-Term Government Bonds 4.8%
Inflation 3.1%
</TABLE>
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1995
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
B-31
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to declare semi-annual dividends of the Fund's net
investment income. Net capital gains, if any, will be distributed at least
annually. In determining amounts of capital gains to be distributed, any capital
loss carryforwards from prior years will be offset against capital gains.
Distributions will be paid in additional Fund shares (based on net asset value),
unless the shareholder elects in writing not less than five full business days
prior to the record date to receive such distributions in cash.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B and Class C shares. See "Net Asset Value."
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. Under
Subchapter M the Fund is not subject to federal income taxes on the taxable
income it distributes to shareholders, provided that it distributes to
shareholders each year at least 90% of its net investment income and net short-
term capital gains in excess of net long-term capital losses, if any.
Qualification as a regulated investment company under the Internal Revenue Code
requires, among other things, that the Fund (a) derive at least 90% of its gross
income from dividends, interest, proceeds from 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 or forward
contracts) derived with respect to its business of investing in such securities
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of securities held less than three months; and (c) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market 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 market 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). The Fund generally will be subject to a
nondeductible excise tax of 4% to the extent that it does not meet certain
minimum distribution requirements as of the end of each calendar year. The Fund
intends to make timely distributions of the Fund's income in compliance with
these requirements. As a result, it is anticipated that the Fund will not be
subject to the excise tax.
The "straddle" provisions of the Internal Revenue Code may also affect the
taxation of the Fund's transactions in options on securities, stock index
futures and options on futures and limit the deductibility of any loss from the
disposition of a position to the extent of the unrealized gain on any offsetting
position. Further, any position in the straddle (e.g., a put option acquired by
the Fund) may affect the holding period of the offsetting position for purposes
of the 30% of gross income test described above, and accordingly the Fund's
ability to enter into straddles and dispose of the offsetting positions may be
limited.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss.
These gains 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 its shareholders as
ordinary income, rather than increasing or decreasing the amount of the Fund's
net capital gain. If Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any taxable
ordinary dividend distributions, or distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders, rather
than as an ordinary dividend, reducing each shareholder's basis in his or her
shares.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
B-32
<PAGE>
PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund has received a written letter
of determination from the Pennsylvania Department of Revenue that the Fund will
be subject to the Pennsylvania foreign franchise tax. Accordingly, it is
believed that Fund shares are exempt from Pennsylvania personal property taxes.
The Fund anticipates that it will continue such business activities but reserves
the right to suspend them at any time, resulting in the termination of the
exemption.
OTHER TAX INFORMATION. The Fund may also be subject to state or local tax in
certain other states where it is deemed to be doing business. Further, in those
states which have income tax laws, the tax treatment of the Fund and of
shareholders of the Fund with respect to distributions by the Fund may differ
from federal tax treatment. Distributions to shareholders may be subject to
additional state and local taxes. Shareholders are advised to consult their own
tax advisers regarding specific questions as to federal, state or local taxes.
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 Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions, and related functions. For
these services, PMFS receives an annual fee per shareholder account, a new
account set-up fee for each manually established account and a monthly inactive
zero balance account fee per shareholder account. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs. For the fiscal year
ended December 31, 1995, the Fund incurred fees of $3,427,000 for the services
of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-33
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF DECEMBER 31, 1995 PRUDENTIAL EQUITY FUND, INC.
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--81.4%
COMMON STOCKS--80.7%
- ---------------------------------------------------------------
<C> <S> <C>
AEROSPACE/DEFENSE--2.2%
70,400 Lockheed Corp. $ 5,561,600
1,740,000 Loral Corp. 61,552,500
40,900 United Technologies Corp. 3,880,388
--------------
70,994,488
- ---------------------------------------------------------------
AUTOMOBILES & TRUCKS--3.9%
1,700,000 Chrysler Corp. 94,137,500
600,000 General Motors Corp. 31,725,000
404,800 Navistar International Corp.(a) 4,250,400
--------------
130,112,900
- ---------------------------------------------------------------
BANKS & FINANCIAL SERVICES--14.5%
1,800,000 American Express Co. 74,475,000
303,800 American Financial Group, Inc. 9,303,875
800,000 American General Corp. 27,900,000
700,000 Bank of New York Co., Inc. 34,125,000
500,000 BankAmerica Corp. 32,375,000
600,000 Chase Manhattan Corp. 36,375,000
900,000 Comerica, Inc. 36,112,500
1,300,000 Dean Witter Discover & Co. 61,100,000
177,000 First America Bank Corp. 7,854,375
1,000,000 Great Western Financial Corp. 25,500,000
800,000 Lehman Brothers Holdings, Inc. 17,000,000
292,505 Mellon Bank Corp. 15,722,144
256,500 Mercantile Bankshares Corp. 7,149,937
345,600 Morgan (J.P.) & Co., Inc. 27,734,400
500,000 NationsBank Corp. 34,812,500
225,000 Republic New York Corp. 13,978,125
600,000 Salomon, Inc. 21,300,000
--------------
482,817,856
- ---------------------------------------------------------------
CHEMICALS--0.5%
706,900 Wellman, Inc. 16,081,975
- ---------------------------------------------------------------
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<C> <S> <C>
COMMERCIAL SERVICES--1.3%
600,000 AAR Corp. $ 13,200,000
273,800 American Standard Cos., Inc. 7,666,400
278,200 TRW Inc. 21,560,500
--------------
42,426,900
- ---------------------------------------------------------------
COMPUTER HARDWARE--7.2%
3,500,000 Amdahl Corp. 29,750,000
1,200,000 Comdisco, Inc. 27,150,000
2,300,000 Digital Equipment Corp.(a) 147,487,500
412,900 Gerber Scientific, Inc. 6,709,625
300,000 International Business Machines
Corp. 27,525,000
--------------
238,622,125
- ---------------------------------------------------------------
CONSTRUCTION & HOUSING--0.6%
550,000 Centex Corp. 19,112,500
- ---------------------------------------------------------------
DIVERSIFIED CONSUMER PRODUCTS--4.0%
750,000 Gibson Greetings Inc. 12,000,000
1,000,000 Loews Corp. 78,375,000
1,400,000 RJR Nabisco Holdings Corp. 43,225,000
--------------
133,600,000
- ---------------------------------------------------------------
DRUGS & MEDICAL SUPPLIES--2.5%
2,000,000 Baxter International Inc. 83,750,000
- ---------------------------------------------------------------
ELECTRIC POWER--0.8%
170,000 American Electric Power Company,
Inc. 6,885,000
570,000 General Public Utilities Corp. 19,380,000
--------------
26,265,000
- ---------------------------------------------------------------
ELECTRONICS--0.5%
15,000 Harris Computer Systems, Inc. 202,500
300,000 Harris Corp. 16,387,500
--------------
16,590,000
- ---------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-34
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF DECEMBER 31, 1995 PRUDENTIAL EQUITY FUND, INC.
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
<C> <S> <C>
ENERGY EQUIPMENT & SERVICES--0.8%
500,000 BJ Services Corp.(a) $ 14,500,000
1,300,000 NorAm Energy Corp. 11,537,500
--------------
26,037,500
- ---------------------------------------------------------------
FOREST PRODUCTS--6.9%
55,000 Crown Vantage Inc. 783,750
225,000 Georgia-Pacific Corp. 15,440,625
1,183,500 International Paper Co. 44,825,062
550,000 James River Corp. of Virginia 13,268,750
1,476,598 Kimberly-Clark Corp. 122,188,484
161,300 Mead Corp. 8,427,925
125,000 Rayonier Inc. 4,171,875
202,300 Temple-Inland Inc. 8,926,488
198,700 Willamette Industries, Inc. 11,176,875
--------------
229,209,834
- ---------------------------------------------------------------
HOSPITALS--3.6%
1,351,300 Foundation Health Corp.(a) 58,105,900
2,937,874 Tenet Healthcare Corp. 60,960,885
--------------
119,066,785
- ---------------------------------------------------------------
INSURANCE--10.3%
1,000,000 Alexander & Alexander Services,
Inc. 19,000,000
600,000 Chubb Corp. 58,050,000
700,000 Citizens Corp. 13,037,500
1,132,700 First Colony Corp. 28,742,262
900,828 Old Republic International Corp. 31,979,394
255,500 Providian Corp. 10,411,625
1,400,000 SAFECO Corp. 48,300,000
426,900 St. Paul Companies, Inc. 23,746,312
1,500,000 The Equitable Companies, Inc. 36,000,000
4,000 Transport Holdings, Inc. 163,000
800,000 Travelers Corp. 50,300,000
1,461,900 Western National Corp. 23,573,138
--------------
343,303,231
- ---------------------------------------------------------------
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
<C> <S> <C>
METALS - NON FERROUS--2.2%
250,000 Alumax Inc.(a) $ 7,656,250
600,000 Aluminum Company of America 31,725,000
122,750 AMAX Gold Inc. 889,938
1,293,000 Cyprus Minerals Co. 33,779,625
--------------
74,050,813
- ---------------------------------------------------------------
OIL & GAS EXPLORATION/PRODUCTION--5.3%
300,000 Amerada Hess Corp. 15,900,000
200,000 Atlantic Richfield Co. 22,150,000
1,100,000 Occidental Petroleum Corp. 23,512,500
1,500,000 Oryx Energy Co. 20,062,500
1,598,596 Societe Nationale Elf Aquitaine,
ADR (France) 58,748,403
738,365 Total SA, ADR (France)(a) 25,104,410
504,400 Union Texas Petroleum Holdings,
Inc. 9,772,750
--------------
175,250,563
- ---------------------------------------------------------------
RETAIL--7.8%
119,700 Dayton-Hudson Corp. 8,977,500
1,642,900 Dillard Department Stores, Inc. 46,822,650
700,000 Federated Department Stores,
Inc.(a) 19,250,000
5,500,000 KMart Corp. 39,875,000
1,000,000 Liz Claiborne, Inc. 27,750,000
500,000 Petrie Stores Corp. 1,375,000
1,168,300 Tandy Corp. 48,484,450
1,432,700 TJX Companies, Inc. 27,042,212
800,000 Toys "R" Us, Inc.(a) 17,400,000
1,100,000 Waban, Inc.(a) 20,625,000
--------------
257,601,812
- ---------------------------------------------------------------
SPECIALTY CHEMICALS--0.8%
388,200 Eastman Chemical Co. 24,311,025
100,000 Witco Corp. 2,925,000
--------------
27,236,025
- ---------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-35
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF DECEMBER 31, 1995 PRUDENTIAL EQUITY FUND, INC.
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
<C> <S> <C>
STEEL--0.8%
500,000 Bethlehem Steel Corp.(a) $ 7,000,000
1,368,300 Birmingham Steel Corp. 20,353,463
--------------
27,353,463
- ---------------------------------------------------------------
TELECOMMUNICATIONS--3.1%
1,446,500 Sprint Corp. 57,679,188
1,100,000 Telefonica de Espana, S.A., ADR
(Spain) 46,062,500
--------------
103,741,688
- ---------------------------------------------------------------
TRANSPORTATION--1.1%
186,900 Canadian National Railway Co.(b) 2,803,500
1,000,000 OMI Corp. 6,500,000
550,000 Overseas Shipholding Group, Inc. 10,450,000
747,517 Southern Pacific Rail Corp. 17,940,408
--------------
37,693,908
--------------
Total common stocks
(cost $1,952,093,521) 2,680,919,366
PREFERRED STOCK--0.7%
4,000,000 RJR Nabisco Holdings Corp.
Conv. Pfd. Stock
(cost $25,999,617) 25,500,000
--------------
Total long-term investments
(cost $1,978,093,138) 2,706,419,366
--------------
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
- ---------------------------------------------------------------
SHORT-TERM INVESTMENTS--19.4%
- ---------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT SECURITY--0.1%
$ 1,500 United States Treasury Note
4.375%, 11/15/96 $ 1,489,176
- ---------------------------------------------------------------
REPURCHASE AGREEMENT--19.3%
642,246 Joint Repurchase Agreement Account,
5.85%, due 1/2/96 (Note 5) 642,246,000
--------------
Total short-term investments
(cost $643,732,293) 643,735,176
--------------
- ---------------------------------------------------------------
TOTAL INVESTMENTS--100.8%
(cost $2,621,825,431; Note 4) 3,350,154,542
Liabilities in excess of other
assets--(0.8%) (27,255,352)
--------------
Net Assets--100% $3,322,899,190
--------------
--------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Installment Receipt. The Fund is liable for a second payment in the amount
of C$10.75 per share on November 26, 1996 if it continues to own this security.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995
ASSETS -----------------
<S> <C>
Investments, at value (cost $2,621,825,431)........................................... $3,350,154,542
Cash.................................................................................. 259,868
Recievable for Fund shares sold....................................................... 8,155,413
Dividends and interest receivable..................................................... 7,342,692
Receivable for investments sold....................................................... 5,020,397
Deferred expenses and other assets.................................................... 42,951
--------------
Total assets....................................................................... 3,370,975,863
--------------
LIABILITIES
Payable for Fund shares reacquired.................................................... 42,383,021
Distribution fee payable.............................................................. 2,070,371
Payable for investments purchased..................................................... 1,648,899
Management fee payable................................................................ 1,292,602
Accrued expenses and other liabilities................................................ 651,610
Deferred Trustees' fees............................................................... 24,013
Forward contract - amount payable to counterparties................................... 6,157
--------------
Total liabilities.................................................................. 48,076,673
--------------
NET ASSETS............................................................................ $3,322,899,190
--------------
--------------
Net assets were comprised of:
Common stock, at par............................................................... $ 2,022,458
Paid-in capital in excess of par................................................... 2,448,996,627
--------------
2,451,019,085
Undistributed net investment income................................................ 42,159,075
Accumulated net realized gain on investments....................................... 101,398,076
Net unrealized appreciation on investments and foreign currencies.................. 728,322,954
--------------
Net assets, December 31, 1995......................................................... $3,322,899,190
--------------
--------------
Class A:
Net asset value and redemption price per share
($1,158,110,658 DIVIDED BY 70,464,888 shares of common stock issued and
outstanding).................................................................... $16.44
Maximum sales charge (5.00% of offering price)..................................... .87
------
Maximum offering price to public................................................... $17.31
------
------
Class B:
Net asset value, offering price and redemption price per share
($2,140,894,944 DIVIDED BY 130,326,420 shares of common stock issued and
outstanding).................................................................... $16.43
------
------
Class C:
Net asset value, offering price and redemption price per share
($23,893,588 DIVIDED BY 1,454,527 shares of common stock issued and
outstanding).................................................................... $16.43
------
------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL EQUITY FUND, INC.
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
NET INVESTMENT INCOME -----------------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $752,910).................... $ 55,983,658
Interest................................. 19,687,736
------------
Total income.......................... 75,671,394
------------
Expenses
Distribution fee--Class A................ 2,270,912
Distribution fee--Class B................ 18,911,600
Distribution fee--Class C................ 121,899
Management fee........................... 13,027,717
Transfer agent's fees and expenses....... 4,180,000
Reports to shareholders.................. 640,000
Franchise taxes.......................... 255,000
Registration fees........................ 242,000
Custodian's fees and expenses............ 200,000
Insurance expense........................ 71,000
Legal fees and expenses.................. 70,000
Audit fee and expenses................... 55,000
Directors' fees.......................... 45,000
Miscellaneous............................ 13,526
------------
Total expenses........................ 40,103,654
------------
Net investment income....................... 35,567,740
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENT AND
FOREIGN CURRENCY TRANSACTIONS
Net realized gain on investment
transactions............................. 221,104,455
------------
Net change in unrealized appreciation/
depreciation on:
Investments.............................. 482,830,366
Foreign currencies....................... (6,157)
------------
482,824,209
------------
Net gain on investments and foreign
currencies............................... 703,928,664
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................... $739,496,404
------------
------------
</TABLE>
PRUDENTIAL EQUITY FUND, INC.
Statement of Changes in Net Assets
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) ---------------------------------
IN NET ASSETS 1995 1994
--------------- ---------------
<S> <C> <C>
Operations
Net investment income..... $ 35,567,740 $ 20,683,314
Net realized gain on
investments............ 221,104,455 81,494,071
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currency
transactions........... 482,824,209 (68,377,840)
--------------- ---------------
Net increase in net assets
resulting from
operations............. 739,496,404 33,799,545
--------------- ---------------
Net equalization
debit/credit.............. (4,049,462) 6,402,186
--------------- ---------------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A................ (17,125,686) (4,339,236)
Class B................ (19,755,318) (16,849,152)
Class C................ (167,436) (14,701)
--------------- ---------------
(37,048,440) (21,203,089)
--------------- ---------------
Distributions from net
realized capital gains
Class A................ (43,407,909) (12,591,770)
Class B................ (84,861,913) (91,043,748)
Class C................ (795,345) (95,226)
--------------- ---------------
(129,065,167) (103,730,744)
--------------- ---------------
Fund share transactions (net
of share conversions)
(Note 6)
Proceeds from shares
sold................... 2,331,421,579 1,454,763,135
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 156,970,117 117,059,026
Cost of shares
reacquired............. (1,984,977,517) (1,264,107,170)
--------------- ---------------
Net increase in net assets
from Fund share
transactions........... 503,414,179 307,714,991
--------------- ---------------
Total increase............... 1,072,747,514 222,982,889
NET ASSETS
Beginning of year............ 2,250,151,676 2,027,168,787
--------------- ---------------
End of year.................. $ 3,322,899,190 $ 2,250,151,676
--------------- ---------------
--------------- ---------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
Prudential Equity Fund, Inc. (the "Fund"), is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. The investment objective of the Fund is long-term growth
of capital by investing primarily in common stocks of major established
corporations.
- ----------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITIES VALUATION: Investments, including options, traded on a national
securities or commodities exchange and NASDAQ National Market equity
securities are valued at the last reported sales price on the primary
exchange on which they are traded. Securities traded in the over-the-counter
market (including securities listed on exchanges whose primary market is
believed to be over-the-counter) and listed securities for which no sale was
reported on that date are valued at the mean between the last reported bid
and asked prices.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which
exceeds the principal amount of the repurchase transaction, including accrued
interest. If the seller defaults and the value of the collateral declines or
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 P.M., New York time.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions
are recorded on the trade date. Realized gains and losses on sales of
investments are calculated on the identified cost basis. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the
accrual basis. Expenses are recorded on the accrual basis which may require
the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of
the day.
FORWARD CURRENCY CONTRACTS: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings or on specific receivables and payables denominated in a
foreign currency. The contracts are valued daily at current exchange rates
and any unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date
of the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks
may arise upon entering into these contracts from the potential inability of
the counterparties to meet the terms of their contracts.
DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income are
declared and paid semi-annually. The Fund will distribute at least annually
net capital gains in excess of loss carryforwards, if any. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
EQUALIZATION: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
TAXES: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income and net capital gains, if any, to
its shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
- ----------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
("PMF"). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's
- --------------------------------------------------------------------------------
B-39
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
performance of such services. PMF has entered into a subadvisory agreement
with The Prudential Investment Corporation ("PIC"); PIC furnishes
investment advisory services in connection with the management of the Fund.
PMF pays for the cost of the subadviser's services, the compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the Fund's average daily net assets up to $500
million, .475 of 1% of the next $500 million of average daily net assets and
.45 of 1% of the Fund's average daily net assets in excess of $1 billion.
The Fund had a distribution agreement with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), which acted as the distributor of the Class A
shares of the Fund through January 1, 1996. Prudential Securities
Incorporated ("PSI"') is distributor of the Class B and Class C shares of
the Fund. The Fund compensated PMFD and PSI for distributing and servicing
the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the `Class A, B and C Plans'), regardless of expenses
actually incurred by them. The distribution fees are accrued daily and
payable monthly. Effective January 2, 1996, PSI became the distributor of the
Class A shares of the Fund and is serving the Fund under the same terms and
conditions as under the arrangement with PMFD.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI, and PMFD
for the year ended December 31, 1995 with respect to Class A shares, for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A Plan were .25 of 1% of the
average daily net assets of Class A shares and 1% of the average daily net
assets under the Class B and C Plans of both the Class B and Class C shares,
respectively, for the year ended December 31, 1995.
PMFD has advised the Fund that it has received approximately $2,251,000 in
front-end sales charges resulting from sales of Class A shares during the
year ended December 31, 1995. From these fees, PMFD paid such sales charges
to dealers (PSI and Prusec) which in turn paid commissions to salespersons.
PSI advised the Fund that for the year ended December 31, 1995, it received
approximately $3,461,900 and $8,400 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ----------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary
of PMF, serves as the Fund's transfer agent and during the year ended
December 31, 1995, the Fund incurred fees of approximately $3,427,000 for the
services of PMFS. As of December 31, 1995, approximately $312,000 of such
fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
For the year ended December 31, 1995, PSI earned $82,445 in brokerage
commissions from portfolio transactions executed on behalf of the Fund.
- ----------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the year ended December 31, 1995 aggregated $443,235,852 and
$533,026,204, respectively.
At December 31, 1995, the Fund had an outstanding forward currency contract
to purchase foreign currency as follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT
PURCHASE CONTRACTS PAYABLE VALUE DESCRIPTION
- ------------------ --------------- ----------- ------------
<S> <C> <C> <C>
Canadian Dollars
expiring 11/15/96 $1,474,191 $1,468,034 $(6,157)
</TABLE>
The federal income tax basis of the Fund's investments at December 31, 1995
was substantially the same as for financial reporting purposes and,
accordingly, net unrealized appreciation for federal income tax purposes was
$728,329,111 (gross unrealized appreciation--$815,973,531; gross unrealized
depreciation--$87,644,420).
- --------------------------------------------------------------------------------
B-40
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. As of December
31, 1995, the Fund has a 55.52% undivided interest in the joint account. The
undivided interest for the Fund represents $642,246,000 in the principal
amount. As of such date, each repurchase agreement in the joint account and
the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 5.80%, in the principal amount of $262,000,000,
repurchase price $262,168,842, due 1/2/96. The value of the collateral
including accrued interest was $267,947,172.
BT Securities Corp., 5.75%, in the principal amount of $61,765,000,
repurchase price $61,804,460, due 1/2/96. The value of the collateral
including accrued interest was $63,059,883.
Goldman, Sachs & Co., 5.90%, in the principal amount of $365,000,000,
repurchase price $365,239,277, due 1/2/96. The value of the collateral
including accrued interest was $372,300,053.
Morgan Stanley & Co. Inc., 5.89%, in the principal amount of $103,000,000,
repurchase price $103,067,406, due 1/2/96. The value of the collateral
including accrued interest was $105,192,608.
Smith Barney, Inc., 5.83%, in the principal amount of $365,000,000,
repurchase price $365,236,438, due 1/2/96. The value of the collateral
including accrued interest was $372,300,416.
- ----------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is
also available for shareholders who qualified to purchase Class A shares at
net asset value.
There are 750 million shares of common stock, $.01 par value per share,
divided into three classes, designated Class A, Class B and Class C common
stock, each of which consists of 250 million authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- -------------- ---------------
<S> <C> <C>
Year ended December 31, 1995:
Shares sold.................... 71,637,369 $ 1,094,814,294
Shares issued in
reinvestment of dividends
and distributions............ 3,610,392 57,800,752
Shares reacquired.............. (66,953,389) (1,028,414,685)
----------- ---------------
Net increase in shares
outstanding before
conversion from Class B...... 8,294,372 124,200,361
Shares issued upon
conversion from Class B...... 41,288,563 582,060,191
----------- ---------------
Net increase in shares
outstanding.................. 49,582,935 $ 706,260,552
----------- ---------------
----------- ---------------
Year ended December 31,
1994:
Shares sold.................... 18,103,878 $ 247,518,724
Shares issued in
reinvestment of dividends
and distributions............ 1,247,329 16,412,624
Shares reacquired.............. (15,323,527) (209,456,746)
----------- ---------------
Net increase in shares
outstanding.................. 4,027,680 $ 54,474,602
----------- ---------------
----------- ---------------
Class B
- -------
Year ended December 31, 1995:
Shares sold.................... 81,698,002 $ 1,215,662,984
Shares issued in
reinvestment of dividends
and distributions............ 6,251,700 98,250,095
Shares reacquired.............. (65,164,474) (953,481,508)
----------- ---------------
Net increase in shares
outstanding before
conversion................... 22,785,228 360,431,571
Shares reacquired upon
conversion into Class A...... (41,293,731) (582,060,191)
----------- ---------------
Net decrease in shares
outstanding.................. (18,508,503) $ (221,628,620)
----------- ---------------
----------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B SHARES AMOUNT
- ------- -------------- ---------------
<S> <C> <C>
Year ended December 31, 1994:
Shares sold.................... 89,556,181 $ 1,203,380,489
Shares issued in
reinvestment of dividends
and distributions............ 7,818,109 100,544,482
Shares reacquired.............. (78,586,261) (1,053,979,338)
----------- ---------------
Net increase in shares
outstanding.................. 18,788,029 $ 249,945,633
----------- ---------------
----------- ---------------
Class C
- -------
Year ended December 31, 1995:
Shares sold.................... 1,352,277 $ 20,944,301
Shares issued in
reinvestment of dividends
and distributions............ 57,365 919,269
Shares reacquired.............. (193,799) (3,081,322)
----------- ---------------
Net increase in shares
outstanding.................. 1,215,843 $ 18,782,248
----------- ---------------
----------- ---------------
August 1, 1994(a) through
December 31, 1994
Shares sold.................... 279,964 $ 3,863,922
Shares issued in
reinvestment of dividends
and distributions............ 7,877 101,920
Shares reacquired.............. (49,158) (671,086)
----------- ---------------
Net increase in shares
outstanding.................. 238,683 $ 3,294,756
----------- ---------------
----------- ---------------
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-42
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........ $ 13.24 $ 13.80 $ 12.07 $ 11.39 $ 9.84
---------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................... .27 .22 .23 .24 .27
Net realized and unrealized gain on
investments and foreign currencies..... 3.88 .09 2.42 1.30 2.09
---------- -------- -------- -------- -------
Total from investment operations....... 4.15 .31 2.65 1.54 2.36
---------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net investment income...... (.27) (.22) (.22) (.23) (.24)
Distributions from net realized capital
gains.................................. (.68) (.65) (.70) (.63) (.57)
---------- -------- -------- -------- -------
Total distributions.................... (.95) (.87) (.92) (.86) (.81)
---------- -------- -------- -------- -------
Net asset value, end of year.............. $ 16.44 $ 13.24 $ 13.80 $ 12.07 $ 11.39
---------- -------- -------- -------- -------
---------- -------- -------- -------- -------
TOTAL RETURN(a):.......................... 31.58% 2.38% 22.14% 13.65% 24.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............. $1,158,111 $276,412 $232,535 $136,834 $82,845
Average net assets (000).................. $ 908,365 $254,596 $190,778 $111,489 $57,845
Ratios to average net assets:
Expenses, including distribution
fees................................ .91% 1.00% .91% .94% .97%
Expenses, excluding distribution
fees................................ .66% .75% .71% .74% .77%
Net investment income.................. 1.82% 1.62% 1.71% 1.91% 2.36%
For Class A, B and C shares:
Portfolio turnover..................... 18% 12% 21% 22% 19%
Average commission rate paid per
share............................... $.0501 N/A N/A N/A N/A
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------------------------- -------------------------
AUGUST 1,
1994(c)
YEAR ENDED DECEMBER 31, YEAR ENDED THROUGH
-------------------------------------------------------- DECEMBER 31, DECEMBER 31,
1995 1994 1993 1992 1991 1995 1994
---------- ---------- ---------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 13.24 $ 13.80 $ 12.08 $ 11.40 $ 9.85 $ 13.24 $ 14.02
---------- ---------- ---------- ---------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................... .16 .12 .12 .14 .18 .16 .09
Net realized and unrealized gain (loss) on
investments and foreign currencies..... 3.87 .09 2.42 1.30 2.09 3.87 (.10)
---------- ---------- ---------- ---------- -------- -------- --------
Total from investment operations....... 4.03 .21 2.54 1.44 2.27 4.03 (.01)
---------- ---------- ---------- ---------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income...... (.16) (.12) (.12) (.13) (.15) (.16) (.12)
Distributions from net realized capital
gains.................................. (.68) (.65) (.70) (.63) (.57) (.68) (.65)
---------- ---------- ---------- ---------- -------- -------- --------
Total distributions.................... (.84) (.77) (.82) (.76) (.72) (.84) (.77)
---------- ---------- ---------- ---------- -------- -------- --------
Net asset value, end of period............ $ 16.43 $ 13.24 $ 13.80 $ 12.08 $ 11.40 $ 16.43 $ 13.24
---------- ---------- ---------- ---------- -------- -------- --------
---------- ---------- ---------- ---------- -------- -------- --------
TOTAL RETURN(a):.......................... 30.62% 1.60% 21.13% 12.72% 23.55% 30.62% .01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $2,140,895 $1,970,580 $1,794,634 $1,203,740 $904,382 $ 23,894 $ 3,160
Average net assets (000).................. $1,891,160 $1,901,972 $1,522,992 $1,042,028 $757,485 $ 12,190 $ 1,847
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.66% 1.75% 1.71% 1.74% 1.77% 1.66% 1.83%(b)
Expenses, excluding distribution
fees................................ .66% .75% .71% .74% .77% .66% .83%(b)
Net investment income.................. .99% .87% .91% 1.11% 1.56% 1.03% .90%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than
a full year are not annualized.
(b) Annualized.
(c) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Equity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Prudential Equity
Fund, Inc. (the "Fund") at December 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at December 31, 1995 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 26, 1996
B-45
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate change. 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.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
[Camera Ready Copy]
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not indicative of the past, present, or future
performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that
contains only one bond with a maturity of roughly 20 years. At the beginning of
each year a new bond with a then-current coupon replaces the old bond. Treasury
bill returns are for a one-month bill. Treasuries are guaranteed by the
government as to the timely payment of principal and interest; equities are not.
Inflation is measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is to
outpace the erosive impact of inflation on investment returns.
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
September 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
YTD
'87 '88 '89 '90 '91 '92 '93 '94 9/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 13.2%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 13.1%
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 16.5%
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 15.6%
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 17.1%
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 4.0
</TABLE>
(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds
that are rated Ba1 or lower by Moody's Investors Service (or rated BB+ or lower
by Standard & Poor's or Fitch Investors Service). All bonds in the index have
maturities of at least one year.
(5)SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1985 through 1994. It does not represent the performance of any
Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (1985-1994) (IN U.S.
DOLLARS)
[Camera Ready Copy]
Source: Morgan Stanley Capital International (MSCI) and Lipper Analytical New
Applications. Used with permission. Morgan Stanley Country indices are unmanaged
indices which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
[Camera Ready Copy]
Source: Stocks Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
--------------------------------
WORLD STOCK MARKET CAPITALIZATION
BY REGION
WORLD TOTAL: $12.4 TRILLION
[Camera Ready Copy]
----------------------------------
Source: Morgan Stanley Capital
International, December 1994.
Used with permission. This chart
represents the capitalization of
major world stock markets as
measured by the Morgan Stanley
Capital International (MSCI)
World Index. The total market
capitalization is based on the
value of 1577 companies in 22
countries (representing
approximately 60% of the
aggregate market value of the
stock exchanges). This chart is
for illustrative purposes only
and does not represent the
allocation of any Prudential
Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of
general interest rates as measured by the long U.S.
Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)
[Camera Ready Copy]
YEAR-END
-------------------------------------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1995
Yearbook, Ibbotson Associates, Chicago (annually updates
work by Roger G. Ibbotson and Rex A. Sinquefield). Used
with permission. All rights reserved. The chart
illustrates the historical yield of the long-term U.S.
Treasury Bond from 1926-1994. Yields represent that of
an annually renewed one-bond portfolio with a remaining
maturity of approximately 20 years. This chart is for
illustrative purposes and should not be construed to
represent the yields of any Prudential Mutual Fund.
II-4
<PAGE>
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows
that a hypothetical blend portfolio constructed of one-third U.S. stocks (S&P
500), one-third foreign stocks (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR
STOCK &
<S> <C> <C>
Bond Indices Over the Past 20 Years
(12/31/75-12/31/95)*
Lehman Aggregate EAFE S&P 500
32.6% 69.9% 37.6%
2.9% 23.2% 7.2%
Best Returns Zone
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Inces
1/3 Lehman Aggregate Index
</TABLE>
* Source: Prudential Investment Corporation based on data from Lipper Analytical
New Applications (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index in an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securities, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.
As of December 31, 1995, Thomas Jackson, the portfolio manager of the Fund,
managed over $7.1 billion in equity assets including the Fund's assets as well
as the Common Stock Portfolio underlying the variable contracts in the
Prudential Series Fund.
II-5
