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PRUDENTIAL EQUITY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 5, 1997
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 Gateway Center Three, Newark, New Jersey 07102, 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 5, 1997, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
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CROSS- REFERENCE
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PAGE PROSPECTUS
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General Information and History.................................. B-2 22
Investment Objective and Policies................................ B-2 9
Investment Restrictions.......................................... B-11 16
Directors and Officers........................................... B-12 17
Manager.......................................................... B-16 17
Distributor...................................................... B-17 18
Portfolio Transactions and Brokerage............................. B-20 19
Purchase and Redemption of Fund Shares........................... B-21 23
Shareholder Investment Account................................... B-25 33
Net Asset Value.................................................. B-28 20
Performance Information.......................................... B-29 20
Dividends, Distributions and Taxes............................... B-31 21
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants..................................................... B-33 19
Financial Statements............................................. B-34 --
Report of Independent Accountants................................ B-46 --
Appendix I--General Investment Information....................... I-1 --
Appendix II--Historical Performance Data......................... II-1 --
Appendix III--Information Relating to The Prudential............. III-1 --
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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 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
consideration (or for additional 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 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
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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, other liquid
assets 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, U.S. Government securities,
equity securities or other liquid, unencumbered assets, equal in value to the
difference. In addition, when the Fund writes a call on an index which is
in-the-money at the time the call is written, the Fund will segregate with its
Custodian or pledge to the broker as collateral cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, 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 or other liquid assets 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 or for return enhancement. When
the Fund purchases stock index futures contracts, an amount of cash or other
liquid assets 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 or futures commission merchant 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. 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 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.
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 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. Although the Fund may be able to minimize
this risk by withholding exercise instructions until just before the daily
cutoff time or
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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.
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
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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. If the Fund enters into a position hedging
transaction, the transaction will be "covered" by the position being hedged or
the Fund's Custodian or sub-custodian will place cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets into a
segregated account of the Fund (less the value of the "covering" positions, if
any) in an amount equal to the value of the Fund's total assets committed to the
consummation of the given forward contract. The assets placed in the segregated
account will be marked-to-market daily, and if the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account so that the value of the account will, at all times, equal
the amount of the Fund's net commitment with respect to such contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the 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. The Fund's ability to enter
into forward foreign currency exchange contracts may be limited by certain
requirements for qualification as a regulated investment company under the
Internal Revenue Code. See "Dividends, Distributions and Taxes."
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.
B-7
<PAGE>
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 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--Hedging and Return Enhancement Strategies,"
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, German Mark 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
B-8
<PAGE>
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.
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, German Mark 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 other liquid assets equal to the aggregate
exercise price of the puts.
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."
B-9
<PAGE>
LENDING OF SECURITIES
The Fund may lend its portfolio securities in an amount of up to 30% of its
total assets to broker-dealers, banks or other recognized institutional
borrowers of securities, provided that the borrower at all times maintains cash
or equivalent collateral or obtains 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 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 15% 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
B-10
<PAGE>
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.
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. 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.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other 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.
10. 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.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% 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.)
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
B-11
<PAGE>
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>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATIONS
(1) WITH FUND DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (72) Director President and Director of BMC Fund,
Inc., a closed-end investment
company; previously, Vice Chairman
of Broyhill Furniture Industries,
Inc.; Certified Public Accountant;
Secretary and Treasurer of
Broyhill Family Foundation Inc.;
Member of the Board of Trustees of
Mars Hill College; Director of The
High Yield Income Fund, Inc.
Delayne Dedrick Gold Director Marketing and Management
(58) Consultant; Director of The High
Yield Income Fund, Inc.
*Robert F. Gunia (50) Director Comptroller (since May 1996) of
Prudential Investments; Executive
Vice President and Treasurer
(since December 1996), Prudential
Mutual Fund Management LLC (PMF);
Senior Vice President (since March
1987) of Prudential Securities
Incorporated (Prudential
Securities); formerly Chief
Administrative Officer (July
1990-September 1996), Director
(January 1989-September 1996), and
Executive Vice President,
Treasurer and Chief Financial
Officer (June 1987-September 1996)
of Prudential Mutual Fund
Management, Inc.; Vice President
and Director of The Asia Pacific
Fund, Inc. (since 1989); Director
of The High Yield Income Fund,
Inc.
Donald D. Lennox (78) Director Chairman (since February 1990) and
Director (since April 1989) of
International Imaging Materials,
Inc. (thermal transfer ribbon
manufacturer); Retired Chairman,
Chief Executive Officer and
Director of Schlegel Corporation
(industrial manufacturing) (March
1987-February 1989); Director of
Gleason Corporation, Personal
Sound Technologies, Inc. and The
High Yield Income Fund, Inc.
Douglas H. McCorkindale Director Vice Chairman, Gannett Co. Inc.
(57) (publishing and media) (since
March 1984); Director of Gannett
Co. Inc., Frontier Corporation and
Continental Airlines, Inc.
*Mendel A. Melzer, CFA, Director Chief Investment Officer (since
ChFC, October 1996) of Prudential Mutual
CLU (35) Funds; formerly Chief Financial
751 Broad St. Officer (November 1995-September
Newark, NJ 07102 1996) of Prudential Investments,
Senior Vice President and Chief
Financial Officer (April
1993-November 1995) of Prudential
Preferred Financial Services,
Managing Director (April
1991-April 1993) of Prudential
Investment Advisors, and Senior
Vice President (July 1989-April
1991) of Prudential Capital
Corporation; Chairman and Director
of Prudential Series Fund, Inc.;
Director of The High Yield Income
Fund, Inc.
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATIONS
(1) WITH FUND DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------
<S> <C> <C>
Thomas T. Mooney (55) Director President of Greater Rochester
Metro Chamber of Commerce; former
Rochester City Manager; Trustee of
Center for Governmental Research,
Inc.; Director of Blue Cross of
Rochester, Monroe County Water
Authority, Rochester Jobs, Inc.,
Executive Service Corps of
Rochester, Monroe County
Industrial Development
Corporation, Northeast Midwest
Institute, The Business Council of
New York State, First Financial
Fund, Inc., The High Yield Income
Fund, Inc. and The High Yield Plus
Fund, Inc.
Stephen P. Munn (54) Director Chairman (since January 1994),
Director and President (since
1988) and Chief Executive Officer
(1988-December 1993) of Carlisle
Companies Incorporated
(manufacturer of industrial
products).
*Richard A. Redeker President and Employee of Prudential Investments;
(53) Director formerly, President, Chief
751 Broad St. Executive Officer and Director
Newark, NJ 07102 (October 1993-September 1996),
Prudential Mutual Fund Management,
Inc., Executive Vice President,
Director and Member of Operating
Committee (October 1993-September
1996), Prudential Securities,
Director (October 1993-September
1996) of Prudential Securities
Group, Inc., Executive Vice
President, The Prudential
Investment Corporation (January
1994-September 1996), Director
(January 1994-September 1996) of
Prudential Mutual Fund
Distributors, Inc. and Prudential
Mutual Fund Services, Inc. and
Senior Executive Vice President
and Director of Kemper Financial
Services, Inc. (September
1978-September 1993); President
and Director of The High Yield
Income Fund, Inc.
Robin B. Smith (57) Director Chairman and Chief Executive
Officer (since August 1996),
formerly President and Chief
Executive Officer (January
1989-August 1996) and President
and Chief Operating Officer
(September 1981-December 1988) of
Publishers Clearing House;
Director of BellSouth Corporation,
The Omnicom Group, Inc., Texaco
Inc., Springs Industries Inc. and
Kmart Corporation.
Louis A. Weil, III (55) Director Publisher and Chief Executive
Officer (since January 1996) and
Director (since September 1991) of
Central Newspapers, Inc.; Chairman
of the Board (since January 1996),
Publisher and Chief Executive
Officer (August 1991-December
1995) of Phoenix Newspapers, Inc.;
formerly Publisher of Time
Magazine (May 1989-March 1991);
formerly President, Publisher and
Chief Executive Officer of The
Detroit News (February 1986-August
1989); formerly member of the
Advisory Board, Chase Manhattan
Bank-Westchester; Director of The
High Yield Income Fund, Inc.
Clay T. Whitehead (58) Director President of National Exchange Inc.
(new business development firm)
(since May 1983).
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATIONS
(1) WITH FUND DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------
<S> <C> <C>
Susan C. Cote (42) Vice President Executive Vice President (since
February 1997) and Chief Financial
Officer (since May 1996), PMF;
formerly Managing Director,
Prudential Investments and Vice
President, The Prudential
Investment Corporation (February
1995-May 1996), Senior Vice
President (January 1989-January
1995) of Prudential Mutual Fund
Management, Inc. and Senior Vice
President (January 1992-January
1995) of Prudential Securities.
Thomas A. Early (42) Vice President Executive Vice President, Secretary
and General Counsel (since
December 1996), PMF; Vice
President and General Counsel,
Prudential Retirement Services
(since March 1994); formerly
Associate General Counsel and
Chief Financial Services Officer,
Frank Russell Company (1988-1994).
S. Jane Rose (51) Secretary Senior Vice President (since
December 1996), PMF; formerly
Senior Vice President (January
1991-September 1996) and Senior
Counsel (June 1987-September 1996)
of Prudential Mutual Fund
Management, Inc.; Senior Vice
President and Senior Counsel
(since July 1992) of Prudential
Securities; formerly Vice
President and Associate General
Counsel of Prudential Securities.
Eugene S. Stark (39) Treasurer and Principal First Vice President (since
Financial and December 1996) of PMF; formerly
Accounting Officer First Vice President (January
1990-September 1996) of Prudential
Mutual Fund Management, Inc.
Stephen M. Ungerman Assistant Treasurer Tax Director (since March 1996) of
(43) Prudential Investments and the
Private Asset Group of The
Prudential Insurance Company of
America (Prudential); formerly
First Vice President of Prudential
Mutual Fund Management, Inc.
(February 1993-September 1996);
prior thereto, Senior Tax Manager
of Price Waterhouse LLP
(1981-January 1993).
Marguerite E.H. Assistant Secretary Vice President (since December
Morrison (40) 1996) of PMF; formerly Vice
President and Associate General
Counsel (June 1991-September 1996)
of Prudential Mutual Fund
Management, Inc.; Vice President
and Associate General Counsel of
Prudential Securities.
<FN>
- ------------------------
(1) Unless otherwise stated, the address is c/o Prudential Mutual Fund
Management LLC, Gateway Center Three, Newark, New Jersey 07102-4077.
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities, Prudential 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, Messrs. Lennox
and Beach are scheduled to retire on December 31, 1997 and 1999, respectively.
B-14
<PAGE>
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 $5,000, in addition to certain out-of-pocket expenses.
The amount of annual compensation paid to each Director may change as a result
of the introduction of additional funds upon which the Director will be asked to
serve.
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 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.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1996 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 PMF (Fund Complex) for the calendar year ended December 31,
1996. In October 1996, shareholders elected a new Board of Directors. Below are
listed all Directors who have served the Fund during its most recent fiscal
year, as well as the new Directors who took office after the shareholder meeting
in October.
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 $ 166,000(21/39)*
Eugene C. Dorsey-Former Director** $ 7,500 None N/A $ 98,583(12/36)*
Delayne Dedrick Gold-Director $ 7,500 None N/A $ 175,308(21/42)*
Robert F. Gunia-Director+ -- None N/A --
Harry A. Jacobs, Jr.-Former
Director -- None N/A $ 0
Donald D. Lennox-Director -- None N/A $ 90,000(10/22)*
Douglas H. McCorkindale-Director** -- None N/A $ 71,208(10/13)*
Mendel A. Melzer-Director+ -- None N/A --
Thomas T. Mooney-Director** $ 7,500 None N/A $ 135,375(18/36)*
Stephen P. Munn-Director -- None N/A $ 49,125(6/8)*
Thomas H. O'Brien-Former Director $ 7,500 None N/A $ 32,250(6/24)*
Richard A. Redeker-Director+ -- None N/A --
Robin B. Smith-Director** -- None N/A $ 89,957(11/20)*
Nancy H. Teeters-Former Director $ 7,500 None N/A $ 103,593(13/31)*
Louis A. Weil, III-Director -- None N/A $ 91,250(13/18)*
Clay T. Whitehead-Director -- None N/A $ 38,292(5/7)*
<FN>
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1996, includes amounts deferred at the election of
Directors under the Funds' deferred compensation plans. Including accrued
interest, total compensation amounted to $111,535, $71,034, $139,869 and
$109,294 for Messrs. Dorsey, McCorkindale and Mooney and Ms. Smith,
respectively.
+ Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are interested
Directors, do not receive compensation from the Fund or any fund in the Fund
Complex.
</TABLE>
As of February 7, 1997, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of common stock of the Fund.
B-15
<PAGE>
As of February 7, 1997, Prudential Securities was the record holder for
other beneficial owners of 37,315,566 Class A shares (or 44.6% of the
outstanding Class A shares), 98,789,481 Class B shares (or 64.7% of the
outstanding Class B shares), 2,146,194 Class C shares (or 75.8% of the
outstanding Class C shares) and 84,272 Class Z shares (or .98% of the
outstanding Class Z 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.
As of February 7, 1997, the beneficial owner, directly or indirectly, of
more than 5% of the outstanding Class Z shares of the Fund was 401k Holding
Account, FBO Hewlett & Davidson, P.O. Box 15040, New Brunswick, NJ 08906, which
held 899,457 Class Z shares (or 10.5% of the outstanding Class Z shares).
MANAGER
The manager of the Fund is Prudential Mutual Fund Management LLC (PMF or the
Manager), Gateway Center Three, Newark, New Jersey 07102. 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, 1997, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $55.8
billion and, according to the Investment Company Institute, as of December 31,
1996, the Prudential Mutual Funds were the 15th largest family of mutual funds
in the United States.
PMF is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary
of PMF, 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. No
such reductions were required during the fiscal year ended December 31, 1996. No
jurisdiction currently limits the Fund's expenses.
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,
doing business as Prudential Investments (PI), pursuant to the subadvisory
agreement between PMF and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's 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
B-16
<PAGE>
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 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 9, 1996 and by
shareholders of the Fund on April 29, 1988.
For the fiscal year ended December 31, 1996, 1995 and 1994, PMF received
management fees of $17,435,738, $13,027,717 and $10,083,085, respectively.
PMF has entered into the Subadvisory Agreement with PI (the Subadviser). The
Subadvisory Agreement provides that PI will furnish investment advisory services
in connection with the management of the Fund. In connection therewith, PI is
obligated to keep certain books and records of the Fund. PMF continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises PI's performance of such services. PI is reimbursed by
PMF for the reasonable costs and expenses incurred by PI in furnishing those
services.
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 9, 1996, 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 PI upon not more than 60 days' nor less than 30
days' written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
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 a distribution agreement
(the Distribution Agreement), Prudential Securities (the Distributor) incurs the
expenses of distributing the Fund's Class A, Class B and Class C shares,
respectively. Prudential Securities also incurs the expenses of distributing the
Fund's Class Z shares under the Distribution Agreement, 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
B-17
<PAGE>
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 9, 1996. 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, 1996, PSI received
payments of $3,084,481 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, 1996,
PSI also received approximately $4,104,000 in initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1996, Prudential
Securities received $24,178,996 from the Fund under the Class B Plan and spent
approximately $25,048,000 in distributing the Class B shares. It is estimated
that of the latter amount, approximately 1.0% ($238,000) was spent on printing
and mailing of prospectuses to other than current shareholders; 29.7%
($7,434,000) 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 69.3% ($17,376,000) 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 (37.3% or $9,343,000) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses (32.0% or $8,033,000). 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, 1996, Prudential
Securities received approximately $4,067,300 in contingent deferred sales
charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1996, Prudential
Securities received $367,452 from the Fund under the Class C Plan and spent
approximately $331,400 in distributing the Fund's Class C shares. It is
estimated that of the latter amount, approximately 3.9% ($12,800) was spent on
printing and mailing of prospectuses to other than current shareholders; 5.4%
($51,000) 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 80.7% ($267,600) 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 (45.5%
or $150,800) and (ii) an allocation on account of overhead and other branch
office distribution-related expenses (35.2% or $116,800). Prudential Securities
also receives the proceeds of contingent deferred sales charges paid by
investors upon certain redemptions of Class C shares. See
B-18
<PAGE>
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended December 31, 1996, Prudential
Securities received approximately $28,400 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
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended. The amended
Distribution Agreement was approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 9, 1996.
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 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
B-19
<PAGE>
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 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
B-20
<PAGE>
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, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------
ITEM 1996 1995 1994
- ---------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $ 1,298,821 $ 1,523,386 $ 1,314,799
Total brokerage commissions paid to
Prudential Securities.................. 142,134 82,445 102,378
Percentage of total brokerage
commissions paid to Prudential
Securities............................. 10.9% 5.4% 7.8%
</TABLE>
The Fund effected approximately 10.9% of the total dollar amount of its
transactions involving the payment of commissions through Prudential Securities
during the year ended December 31, 1996. Of the total brokerage commissions paid
during that period, $1,054,642 (or 81.2%) 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 offered to a limited group of investors at net asset value without any sales
charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
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 (except for Class Z shares,
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting rights
with respect to any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account--Exchange Privilege."
B-21
<PAGE>
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, 1996, 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................ $ 17.26
Maximum sales charge (5% of offering price)........................... .91
--------
Maximum offering price to public...................................... $ 18.17
--------
--------
CLASS B
Net asset value, offering price and redemption price per Class B
share*............................................................... $ 17.24
--------
--------
CLASS C
Net asset value, offering price and redemption price per Class C
share*............................................................... $ 17.24
--------
--------
CLASS Z
Net asset value, offering price and redemption price per Class Z
share................................................................ $ 17.26
--------
--------
</TABLE>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of 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) 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.
B-22
<PAGE>
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 (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
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.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant goal
over a thirteen-month period. Each investment made during the period, in the
case of an Investment Letter of Intent, will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment made
during the period will be made at net asset value. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser, except in the case of retirement
and group plans where the employer or plan sponsor will be responsible for
paying any applicable sales charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales 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.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
B-23
<PAGE>
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.
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.
B-24
<PAGE>
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.
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
B-25
<PAGE>
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, Inc. 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.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the 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.
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.
B-26
<PAGE>
(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.
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-27
<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 marketed collectively. Typically, these programs are
created with an investment theme, E.G., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their 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-28
<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, if any, which will differ by
approximately the amount of the distribution and/or service fee 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, 1996 were
12.1%, 15.9% and 15.1%, respectively. The average annual total returns for Class
B shares of the Fund for the one, five,ten year and since inception (March 15,
1982) periods ended on December 31, 1996 were 12.1%, 16.1%, 14.4% and 16.7%,
respectively. The average annual total returns for Class C shares for the one
year and since inception (August 1, 1994) periods ended December 31, 1996 were
16.1% and 19.2%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. 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, 1996 were
17.9%, 120.6% and 179.0%, respectively. The aggregate total returns for Class B
shares for
B-29
<PAGE>
the one, five, ten year and since inception (March 15, 1982) periods ended on
December 31, 1996 were 17.1%, 112.1%, 282.2% and 876.4%, respectively. The
aggregate total returns for Class C shares for the one year and since inception
(August 1, 1994) periods ended December 31, 1996 were 17.1% and 53.0%,
respectively. The aggregate total return for the Class Z shares for the since
inception (March 1, 1996) period ended December 31, 1996 was 13.7%.
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, Class C and Class Z shares
for the 30-day period ended December 31, 1996 were 1.86%, 1.22%, 1.22% and
2.20%, respectively.
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>
<S> <C> <C> <C>
Performance
Comparison of
Different
Types of Investments
Over the Long Term
(1/192612/1994)
Long-Term Govt.
Common Stocks Bonds Inflation
10.2% 4.8% 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-30
<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. 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 annual gross income (without reduction for
losses from the sale or other disposition of securities) from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures 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 gains (without
reduction for losses) from the sale or other disposition of securities, options
thereon, futures contracts and options thereon, forward contracts and currencies
held less than three months (except for foreign currencies directly related to
the Fund's business of investing in foreign securities); (c) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
and other securities limited, in respect of any one issuer, to an amount not
greater than 5% of the value of the Fund's assets and 10% of the outstanding
voting securities of such issuer and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities); and (d) distribute to its shareholders at least 90% of
its net investment income and net short-term gains (i.e., the excess of net
short-term capital gains over net long-term capital losses) in each year. 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.
Gains or losses on sales of securities by the Fund will be long-term capital
gains or losses if the securities have been held by it for more than one year,
except in certain cases where the Fund acquires a put or writes a call thereon
or otherwise holds a "short" position with respect to the securities. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. Gains and losses on the sale, lapse or other termination of options on
stock will generally be treated as gains and losses from the sale of stock. For
federal income tax purposes, when call options which the Fund has written expire
unexercised, the premiums received by the Fund give rise to short-term capital
gains at the time of expiration. When a call written by the Fund is exercised,
the selling price of the stock is increased by the amount of the premium, and
the gain or loss on the sale of stock becomes long-term or short-term depending
on the stock's holding period. Certain futures and forward contracts and options
held by the Fund will be required to be "marked to market" for federal income
tax purposes, that is, treated as having been sold at fair market value on the
last day of Fund's fiscal year. Any gain or loss recognized on these deemed
sales of these futures and forward contracts and options will be treated as 60%
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss. Certain of the Fund's transactions may be subject to wash
sale and short sale provisions of the Internal Revenue Code that may, among
other things, require the Fund to defer losses.
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 forward foreign
currency exchange contracts or dispositions of debt securities denominated in a
foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Internal Revenue Code as "Section 988" gains or
B-31
<PAGE>
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.
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.
B-32
<PAGE>
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 LLC (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, 1996, the Fund incurred fees of $4,310,000 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>
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.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY.
[CHART]
<TABLE>
<S> <C>
VALUE OF $1.00 INVESTED ON
1/1/26 THROUGH 12/31/96
Small Stocks $4,495.99
Common Stocks $1,370.95
Long-Term Bonds $ 33.73
Treasury Bills $ 13.54
Inflation $ 8.87
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1996 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 due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 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>
'87 '88 '89 '90 '91 '92 '93 '94 '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)% 18.4%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8%
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3%
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</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 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (1986-1995) (IN U.S.
DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Hong Kong 23.8%
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
</TABLE>
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.
[CHART]
1969-1995
Capital Appreciation and Reinvesting Dividends -- $186,208
Capital Appreciation Only -- $66,913
Source: Stocks Bonds, Bills, and Inflation 1996 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: $9.2 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. 40.8%
Pacific
Basin 28.7%
Europe 28.3%
Canada 2.2%
</TABLE>
-------------------------------------------
Source: Morgan Stanley Capital International, December 1995. 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 1579 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 (1926-1996)
[CHART]
-------------------------------------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1996
Yearbook, Ibbotson Associates, Chicago (annually updates
work by Roger G. Ibbotson and Rex A. Sinquefield). Used
with permission. All rights reserved. The chart
illustrates the historical yield of the long-term U.S.
Treasury Bond from 1926-1996. Yields represent that of
an annually renewed one-bond portfolio with a remaining
maturity of approximately 20 years. This chart is for
illustrative purposes and should not be construed to
represent the yields of any Prudential Mutual Fund.
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 &
BOND INDICES OVER THE PAST 20 YEARS
(12/31/75-12/31/95)*
<S> <C> <C>
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 Index
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, 1996, Thomas Jackson, the portfolio manager of the Fund,
managed over $9 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, Inc.
II-5
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. 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 more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,500 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.7 million
cars and insures more than 1.4 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. In July
1996, INSTITUTIONAL INVESTOR ranked Prudential the fifth largest institutional
money manager of the 300 largest money management organizations in the United
States as of December 31, 1995. As of December 31, 1995, Prudential had more
than $314 billion in assets under management. Prudential Investments, a business
group of Prudential (of which Prudential Mutual Funds is a key part) manages
over $190 billion in assets of institutions and individuals.
REAL ESTATE. 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.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteen largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
(1) Prudential Investments, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate
Fund, Inc., Jennison Associates Capital Corp. as the subadviser to
Prudential Jennison Series Fund, Inc. and Prudential Active Balanced Fund, a
portfolio of Prudential Dryden Fund, Mercator Asset Management LP as the
subadviser to International Stock Series, a portfolio of Prudential World
Fund, Inc. and BlackRock Financial Management, Inc. as subadviser to The
BlackRock Government Income Trust. There are multiple subadvisers for the
Target Portfolio Trust.
(2) As of December 31, 1994
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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.
EQUITY FUNDS. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP and PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 559 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage Funds.
(6) As of December 31, 1994
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Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of REGISTERED REP.,
an industry publication, Prudential Securities' Financial Advisor training
programs received a grade of A-(compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectsSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
(7) As of December 31, 1994.
(8) On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
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