<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 29, 2000
SECURITIES ACT REGISTRATION NO. 2-75128
INVESTMENT COMPANY ACT REGISTRATION NO. 811-3336
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 27 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
/ /
AMENDMENT NO. 28 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL EQUITY FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525
MARGUERITE E.H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service of Process)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on March 1, 2000 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
Title of Securities Being Registered...Shares of Common Stock, par value
$.01 per share.
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<PAGE>
[PRUDENTIAL LOGO]
PROSPECTUS MARCH 1, 2000
Prudential
Equity Fund, Inc.
FUND TYPE Stock
OBJECTIVE Long-term growth of capital
As with all mutual funds, the
Securities and Exchange
Commission has not approved or
disapproved the Fund's shares nor
has the SEC determined that this
prospectus is complete or
accurate. It is a criminal
offense to state otherwise.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 HOW THE FUND INVESTS
5 Investment Objective and Policies
6 Other Investments and Strategies
9 Investment Risks
12 HOW THE FUND IS MANAGED
12 Board of Directors
12 Manager
12 Investment Adviser
12 Portfolio Manager
13 Distributor
14 FUND DISTRIBUTIONS AND TAX ISSUES
14 Distributions
15 Tax Issues
16 If You Sell or Exchange Your Shares
18 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
18 How to Buy Shares
26 How to Sell Your Shares
30 How to Exchange Your Shares
32 FINANCIAL HIGHLIGHTS
32 Class A Shares
33 Class B Shares
34 Class C Shares
35 Class Z Shares
36 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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This section highlights key information about the PRUDENTIAL EQUITY FUND, INC.,
which we refer to as "the Fund." Additional information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is LONG-TERM GROWTH OF CAPITAL. This means we seek
investments whose price will increase over several years. We normally invest at
least 65% of the Fund's total assets in the common stock of major, established
companies that we believe are in sound financial condition and have the
potential for price appreciation greater than broadly-based stock indexes.
We also may invest in equity-related securities such as preferred stock and
convertible securities. We may use derivatives for hedging or to improve the
Fund's returns. While we make every effort to achieve our objective, we can't
guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the Fund
invests primarily in common stock, there is the risk that the price of
particular stocks we own could go down, or the value of the equity markets or a
sector of them could go down. Stock markets are volatile. The Fund's holdings
can vary significantly from broad stock market indexes. As a result, the Fund's
performance can deviate from the performance of these indexes.
Some of our investment strategies--such as using derivatives-- involve
above-average risks. The Fund may use risk management techniques to try to
preserve assets or enhance return. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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WE'RE VALUE INVESTORS
In deciding which stocks to buy, we use what is known as a value investment
style. That is, we invest in stocks that we believe are undervalued, given the
company's earnings, assets, cash flow and dividends. We consider selling a
security if it has increased in value to the point where we no longer consider
it to be undervalued.
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1
<PAGE>
RISK/RETURN SUMMARY
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EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual returns compare with a stock
index and a group of similar mutual funds. Past performance does not mean that
the Fund will achieve similar results in the future.
ANNUAL RETURNS* (CLASS B SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 -4.28%
1991 23.55%
1992 12.72%
1993 21.13%
1994 1.60%
1995 30.62%
1996 17.14%
1997 23.05%
1998 7.55%
1999 11.69%
BEST QUARTER: 17.97% (1st quarter of 1991)
WORST QUARTER: -15.48% (3rd quarter of 1998)
</TABLE>
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares 6.87% 17.37% N/A 14.96% (since 1-22-90)
Class B shares 6.69% 17.61% 14.00% 16.17% (since 3-15-82)
Class C shares 9.57% 17.48% N/A 16.04% (since 8-1-94)
Class Z shares 12.81% N/A N/A 15.37% (since 3-1-96)
S&P 500(2) 21.03% 28.54% 18.19% N/A(2)
Lipper Average(3) 7.78% 18.48% 13.26% N/A(3)
</TABLE>
<TABLE>
<S> <C>
1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND
EXPENSES. WITHOUT THE DISTRIBUTION AND SERVICE (12B-1) FEE
WAIVER FOR CLASS A SHARES, THE RETURNS WOULD HAVE BEEN
LOWER.
2 THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX (S&P
500)--AN UNMANAGED INDEX OF 500 STOCKS OF LARGE U.S.
COMPANIES--GIVES A BROAD LOOK AT HOW STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY
SALES CHARGES OR OPERATING EXPENSES OF A MUTUAL FUND. THESE
RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES
CHARGES AND OPERATING EXPENSES. S&P 500 RETURNS SINCE THE
INCEPTION OF EACH CLASS ARE 19.18% FOR CLASS A, 19.30% FOR
CLASS B, 26.42% FOR CLASS C AND 26.22% FOR CLASS Z SHARES.
SOURCE: LIPPER INC.
3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL
MUTUAL FUNDS IN THE LIPPER MULTI-CAP VALUE FUNDS CATEGORY
AND DOES NOT INCLUDE THE EFFECT OF ANY SALES CHARGES. AGAIN,
THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF
SALES CHARGES. LIPPER RETURNS SINCE THE INCEPTION OF EACH
CLASS ARE 14.07% FOR CLASS A, 15.26% FOR CLASS B, 16.94% FOR
CLASS C AND 14.71% FOR CLASS Z SHARES. SOURCE: LIPPER INC.
</TABLE>
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2 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each class of the Fund--Class A, B, C and Z. Each share
class has different sales charges--known as loads--and expenses, but represents
an investment in the same fund. Class Z shares are available only to a limited
group of investors. For more information about which share class may be right
for you, see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price) 5% None 1% None
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load) imposed on
reinvested dividends and other distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .46% .46% .46% .46%
+ Distribution and service (12b-1) fees .30%(4) 1.00% 1.00% None
+ Other expenses .15% .15% .15% .15%
= Total annual Fund operating expenses .91% 1.61% 1.61% .61%
- Waivers and/or reimbursements .05% None None None
= NET ANNUAL FUND OPERATING EXPENSES .86%(4) 1.61% 1.61% .61%
</TABLE>
<TABLE>
<S> <C>
1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR
PURCHASES AND SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B
SHARES DECREASES BY 1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH
YEARS AND 0% IN THE SEVENTH YEAR. CLASS B SHARES CONVERT TO
CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN
18 MONTHS OF PURCHASE.
4 FOR THE FISCAL YEAR ENDING 12-31-00, THE DISTRIBUTOR OF THE
FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND
SERVICE (12B-1) FEES FOR CLASS A SHARES TO .25 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
</TABLE>
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3
<PAGE>
RISK/RETURN SUMMARY
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EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during the
first year. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $583 $771 $974 $1,559
Class B shares $664 $808 $976 $1,636
Class C shares $362 $603 $967 $1,992
Class Z shares $ 62 $195 $340 $ 762
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $583 $771 $974 $1,559
Class B shares $164 $508 $876 $1,636
Class C shares $262 $603 $967 $1,992
Class Z shares $ 62 $195 $340 $ 762
</TABLE>
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4 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is LONG-TERM GROWTH OF CAPITAL. This means we
seek investments whose price will increase over several years. While we make
every effort to achieve our objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 65% of the Fund's
total assets in the COMMON STOCK OF MAJOR, ESTABLISHED COMPANIES. These are
companies that we believe are in sound financial condition and have the
potential for price appreciation greater than broadly-based stock indexes. This
means that we focus on stocks that we believe will increase in value more than
the average value increase of the stocks that make up the Standard & Poor's 500
Composite Stock Price Index or similar indexes.
Although we buy common stock of major, established companies, these
companies may be small, medium or large capitalization companies. In addition to
buying common stocks, we may invest in other equity-related securities. These
include nonconvertible preferred stock; warrants and rights that can be
exercised to obtain stock; investments in various types of business ventures,
including partnerships and joint ventures; real estate investment trusts
(REITs); American Depositary Receipts (ADRs); and similar securities.
We also may buy convertible securities. These are securities--like bonds,
corporate notes and preferred stocks--that we can convert into the company's
common stock or some other equity security. Generally, we consider selling a
security when it has increased in value to the point where it is no longer
undervalued in the opinion of the investment adviser.
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.
- -------------------------------------------------------------------
WE USE A CONTRARIAN APPROACH
To achieve our value investment strategy, we generally take a strong contrarian
approach to investing. In other words, we usually buy securities that are out of
favor and that many other investors are selling, and we attempt to invest in
companies and industries before other investors recognize their true value.
Using these guidelines, we focus on long-term performance, not short-term gain.
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5
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board can change investment policies
that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to try to increase the Fund's returns or protect its
assets if market conditions warrant.
SHORT-TERM DEBT OBLIGATIONS, INCLUDING MONEY MARKET INSTRUMENTS
We may invest in investment-grade short-term debt obligations (such as those
rated A-2/Prime-2 or above by Standard & Poor's Ratings Group or Moody's
Investors Service, Inc., respectively), including money market instruments.
Money market instruments include the commercial paper of U.S. corporations, the
obligations of U.S. banks (including foreign branches), certificates of deposit
and obligations issued or guaranteed by the U.S. government or its agencies or a
foreign government. Generally, debt obligations provide a fixed rate of return,
but provide less opportunity for capital appreciation than investing in stocks.
FOREIGN SECURITIES
We may invest up to 30% of the Fund's total assets in FOREIGN SECURITIES,
including stocks and other equity-related securities, fixed-income securities
and money market instruments. For purposes of the 30% limit, we do not consider
ADRs and other similar receipts or shares to be foreign securities.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in money market instruments.
Investing heavily in these securities limits our ability to achieve capital
appreciation, but can help to preserve the Fund's assets when the equity markets
are unstable.
REPURCHASE AGREEMENTS
The Fund also may use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund and is, in effect, a loan by the
Fund.
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6 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets. We cannot guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Fund will not lose money. Derivatives--such as futures, options,
foreign currency forward contracts and options on futures--involve costs and can
be volatile. With derivatives, the investment adviser tries to predict whether
the underlying investment--a security, market index, currency, interest rate or
some other benchmark--will go up or down at some future date. We may use
derivatives to try to reduce risk or to increase return consistent with the
Fund's overall investment objective. The investment adviser will consider other
factors (such as cost) in deciding whether to employ any particular strategy or
use any particular instrument. Any derivatives we use may not match the Fund's
underlying holdings.
OPTIONS. The Fund may purchase and sell put and call options on equity
securities, stock indexes and foreign currencies traded on U.S. or foreign
securities exchanges, on NASDAQ or in the over-the-counter market. An OPTION is
the right to buy or sell securities or currencies in exchange for a premium. The
Fund will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS
FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may purchase and sell stock index
futures contracts and related options on stock index futures. The Fund also may
purchase and sell futures contracts on foreign currencies and options on foreign
currency futures contracts. A FUTURES CONTRACT is an agreement to buy or sell a
set quantity of an underlying product at a future date, or to make or receive a
cash payment based on the value of a securities index. The Fund also may enter
into foreign currency forward contracts to protect the value of its assets
against future changes in the level of foreign exchange rates. A FOREIGN
CURRENCY FORWARD CONTRACT is an obligation to buy or sell a given currency on a
future date at a set price.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 30% of the value of its total assets, including
collateral received in the transaction); and HOLDS ILLIQUID SECURITIES (the Fund
may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions on resale, those without a
readily available market and repurchase agreements with maturities longer than
seven days). The Fund is subject to certain investment restrictions that are
fundamental policies, and cannot be changed without shareholder approval. For
more information about these restrictions, see the SAI.
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8 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. See,
too, "Description of the Fund, Its Investments and Risks" in the SAI.
INVESTMENT TYPE
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
- -----------------------------------------------------------------------------------
COMMON STOCK OF -- Individual stocks -- Historically, stocks
MAJOR, ESTABLISHED could lose value have outperformed
COMPANIES -- The equity markets other investments
AT LEAST 65% could go down, over the long term
resulting in a -- Generally, economic
decline in value of growth means higher
the Fund's invest- corporate profits,
ments which lead to an
-- Changes in economic or increase in stock
political conditions, prices, known as
both domestic and in- capital appreciation
ternational, may
result in a decline
in value of the
Fund's investments
- -----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
- ----------------------------------------------------------------------------------------
SHORT-TERM -- Credit risk--the risk -- Regular interest
DEBT OBLIGATIONS that the default of income
UP TO 35% an issuer would leave -- The U.S. government
the Fund with unpaid guarantees interest
interest or and principal
principal. The lower payments on
a bond's quality, the certain securities
higher its potential -- High-quality debt
volatility obligations are
-- Market risk--the risk generally more secure
that the market value than stocks since
of an investment may companies must pay
move up or down, their debts before
sometimes rapidly or they pay dividends
unpredictably. Market
risk may affect an
industry, a sector or
the market as a whole
- ----------------------------------------------------------------------------------------
FOREIGN SECURITIES -- Foreign markets, -- Investors can
UP TO 30% economies and participate in the
political systems may growth of foreign
not be as stable as markets and companies
in the U.S. operating in those
-- Currency risk -- markets
changing value of -- Changing values of
foreign currencies foreign currencies
can cause losses -- Opportunities for
-- May be less liquid diversification
than U.S. stocks and
bonds
-- Differences in foreign
laws, accounting
standards, public
information, custody
and settlement
practices provide
less reliable
information on
foreign investments
and involve more risk
- ----------------------------------------------------------------------------------------
</TABLE>
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10 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
- ----------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Fund could make
PERCENTAGE VARIES futures, options and money and protect
foreign currency against losses if the
forward contracts investment analysis
that are used for proves correct
hedging purposes may -- Derivatives that
not fully offset the involve leverage
underlying positions could generate
and this could result substantial gains at
in losses to the Fund low cost
that would not have -- One way to manage the
otherwise occurred Fund's risk/return
-- Derivatives used for balance is by locking
risk management may in the value of an
not have the intended investment ahead of
effects and may time
result in losses or
missed opportunities
-- The other party to a
derivatives contract
could default
-- Derivatives that
involve leverage
could magnify losses
-- Certain types of
derivatives involve
costs to the Fund
that can reduce
returns
- ----------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer a more
UP TO 15% OF NET ASSETS value precisely attractive yield or
-- May be difficult to potential for growth
sell at the time or than more widely
price desired traded securities
- ----------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for -- May preserve the
UP TO 35% ON A NORMAL BASIS capital appreciation Fund's assets
AND UP TO 100% ON A -- See credit risk and
TEMPORARY BASIS market risk
- ----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------
BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager, Investment
Adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers, who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended December 31, 1999, the Fund paid PIFM management fees of .46% of the
Fund's average net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of January 31, 2000, PIFM served as the
manager to all 43 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $74.9 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street, Newark,
NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
PORTFOLIO MANAGER
THOMAS R. JACKSON, a Managing Director of Prudential Investments, has managed
the Fund since 1990. Mr. Jackson joined Prudential Investments in 1990 and has
over 30 years of professional equity investment management experience. He earned
a B.A. from Dartmouth College and is a member of the New York Society of
Security Analysts.
- -------------------------------------------------------------------
12 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------
As a value investor, Mr. Jackson seeks companies selling at a discount from
their perceived true worth. He selects stocks at prices which in his view are
temporarily low relative to the company's earnings, assets, cash flow and
dividends.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.
- --------------------------------------------------------------------------------
13
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account. Dividends
and distributions from the Fund also may be subject to state and local income
tax in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to
shareholders--typically semiannually. For example, if the Fund owns ACME Corp.
stock and the stock pays a dividend, the Fund will pay out a portion of this
dividend to its shareholders, assuming the Fund's income is more than its costs
and expenses. The dividends you receive from the Fund will be taxed as ordinary
income, whether or not they are reinvested in the Fund.
The Fund also distributes realized net CAPITAL GAINS to shareholders--
typically once a year. Capital gains are generated when the Fund sells its
assets for a profit. For example, if the Fund bought 100 shares of ACME Corp.
stock for a total of $1,000 and more than one year later sold the shares for a
total of $1,500, the Fund has net long-term capital gains of $500, which it will
pass on to shareholders (assuming the Fund's total gains are greater than any
losses it may have). Capital gains are taxed differently depending on how long
the Fund holds the security--if a security is held more than one year before it
is sold, LONG-TERM capital gains are taxed at the rate of 20%, but if the
security is held one year or less, SHORT-TERM capital gains are taxed at
ordinary income rates of up to 39.6%. Different rates apply to corporate
shareholders.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your
- -------------------------------------------------------------------
14 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
account is with the Transfer Agent. Otherwise, if your account is with a broker,
you will receive a credit to your account. Either way, the distributions may be
subject to taxes, unless your shares are held in a qualified tax-deferred plan
or account. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions and sale proceeds.
Dividends of net investment income and short-term capital gains paid to a
nonresident foreign shareholder generally will be subject to a U.S. withholding
tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may
have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought
- --------------------------------------------------------------------------------
15
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
shares one day and soon thereafter received a distribution. That is not so
because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend to reflect the payout, although this may
not be apparent because the value of each share of the Fund also will be
affected by the market changes, if any. The distribution you receive makes up
for the decrease in share value. However, the timing of your purchase does mean
that part of your investment came back to you as taxable income.
QUALIFIED OR TAX-DEFERRED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
[CHART]
+$ CAPITAL GAIN
(taxes owed)
RECEIPTS OR
FROM SALE
-$ CAPITAL LOSS
(offset against gain)
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares). If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
- -------------------------------------------------------------------
16 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on Form 1099; however, proceeds from the sale or exchange will
be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
- --------------------------------------------------------------------------------
17
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- -------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are higher
than Class A share expenses. With Class C shares, you pay a 1% front-end sales
charge and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
varying distribution fees
-- The different sales charges that apply to each share class--
Class A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front-end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
- -------------------------------------------------------------------
18 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent purchases(1)
Maximum initial sales 5% of the None 1% of the None
charge public public
offering offering
price price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees (.25 of 1%
shown as a percentage currently)
of average net
assets(3)
</TABLE>
<TABLE>
<S> <C>
1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN
RETIREMENT AND EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS
FOR MINORS. THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT
FOR PURCHASES MADE THROUGH THE AUTOMATIC INVESTMENT PLAN IS
$50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS
CALCULATED, SEE "HOW TO SELL YOUR SHARES--CONTINGENT
DEFERRED SALES CHARGE (CDSC)." CLASS C SHARES BOUGHT BEFORE
NOVEMBER 2, 1998 HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE FUND'S ASSETS ON A
CONTINUOUS BASIS. OVER TIME, THE FEES WILL INCREASE THE COST
OF YOUR INVESTMENT AND MAY COST YOU MORE THAN PAYING OTHER
TYPES OF SALES CHARGES. THE SERVICE FEE FOR CLASS A, CLASS B
AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE FOR
CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE .25 OF
1% SERVICE FEE) AND IS .75 OF 1% FOR CLASS B AND CLASS C
SHARES. FOR THE FISCAL YEAR ENDING 12-31-00, THE DISTRIBUTOR
OF THE FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS
DISTRIBUTION AND SERVICE (12B-1) FEES FOR CLASS A SHARES TO
.25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A
SHARES.
</TABLE>
- --------------------------------------------------------------------------------
19
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales
charge by increasing the amount of your investment. This table shows how
the sales charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above* None None None
</TABLE>
<TABLE>
<S> <C>
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A
SHARES, UNLESS YOU QUALIFY TO BUY CLASS Z SHARES.
</TABLE>
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy the Class A shares of two or more Prudential mutual funds at the
same time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the
current value of Prudential mutual fund shares you already own with
the value of the shares you are purchasing for purposes of
determining the applicable sales charge (note: you must notify the
Transfer Agent if you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in the Fund and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of
- -------------------------------------------------------------------
20 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
eligible employees. For more information about these requirements, call
Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services
-- Mutual fund "supermarket" programs where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, the Prudential
mutual funds, the subadvisers of the Prudential mutual funds and registered
representatives and employees of brokers that have entered into a dealer
agreement with the Distributor. To qualify for a reduction or waiver of the
sales charge, you must notify the Transfer Agent or your broker at the time of
purchase. For more information, see the SAI, "Purchase, Redemption and Pricing
of Fund Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the
- --------------------------------------------------------------------------------
21
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
purchase is made with money from the redemption of shares of any unaffiliated
investment company, as long as the shares were not held in an account at
Prudential Securities Incorporated (Prudential Securities) or one of its
affiliates. These purchases must be made within 60 days of the redemption. To
qualify for this waiver, you must do one of the following:
-- Purchase your shares through an account at Prudential Securities
-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
-- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades, links its clients' accounts to a master account
in the sponsor's name and charges its clients a management,
consulting or other fee for its services
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their
- -------------------------------------------------------------------
22 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the
following:
-- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
-- Prudential, with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined
by a simple calculation--it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York time on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. We do not determine the
NAV on days when we have not received any orders to purchase, sell or exchange
Fund shares, or when changes in the value of the Fund's portfolio do not
materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
- -------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock in
its portfolio and the price of ACME stock goes up, while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
24 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for PruTector coverage after
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
the initial 6-month enrollment period will need to provide satisfactory evidence
of insurability. This insurance is subject to other restrictions and is not
available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, your broker must receive your order to sell by 4:15 p.m. New York
time to process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
- -------------------------------------------------------------------
26 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust, and you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker-dealer or credit union. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
(five years for Class B shares purchased before January 22, 1990) and
18 months for Class C shares (one year for Class C shares purchased
before November 2, 1998)
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares)
-- Amounts representing the cost of shares acquired prior to July 1,
1985.
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
representing the cost of shares held for the longest period of time within the
applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth and 1% in the fifth and sixth years. The rate decreases on the first
day of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase (one year for Class C shares purchased
before November 2, 1998). For both Class B and Class C shares, the CDSC is
calculated based on the lesser of the original purchase price or the redemption
proceeds. For purposes of determining how long you've held your shares, all
purchases during the month are grouped together and considered to have been made
on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy, provided the shares were purchased before the death or
disability
-- To provide for certain distributions--made without IRS penalty--from
a tax-deferred retirement plan, IRA or Section 403(b) custodial
account
-- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for purchases by certain group retirement
plans for which Prudential or brokers not affiliated with
- -------------------------------------------------------------------
28 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
Prudential provide administrative or recordkeeping services. The CDSC also will
be waived for certain redemptions by benefit plans sponsored by Prudential and
its affiliates. For more information, call Prudential at (800) 353-2847.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
qualified tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
you by your employer or plan trustee, you must arrange for the distribution
request to be signed and sent by the plan administrator or trustee. For
additional information, see the SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential mutual fund,
but you can't exchange Class A shares for Class B, Class C or Class Z shares.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. After an exchange, at redemption
the CDSC will be calculated from the first day of the month after initial
purchase, excluding any time shares were held in a money market fund. We may
change the terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding period for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
- -------------------------------------------------------------------
30 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The decision
may be based upon dollar amount, volume and frequency of trading. The Fund may
notify a market timer of rejection of an exchange or purchase order after the
day the order is placed. If the Fund allows a market timer to trade Fund shares,
it may require the market timer to enter into a written agreement to follow
certain procedures and limitations.
- --------------------------------------------------------------------------------
31
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
CLASS A SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS A SHARES (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $19.76 $19.85 $17.26 $16.44 $13.24
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .26 .31 .38 .35 .27
Net realized and unrealized
gain on investments and
foreign currencies 2.15 1.37 3.70 2.52 3.88
TOTAL FROM INVESTMENT
OPERATIONS 2.41 1.68 4.08 2.87 4.15
LESS DISTRIBUTIONS:
Dividends from net investment
income (.27) (.28) (.36) (.35) (.27)
Distributions from net
realized capital gains (2.61) (1.49) (1.13) (1.69) (.68)
Distributions in excess of net
investment income -- -- -- (.01) --
TOTAL DISTRIBUTIONS (2.88) (1.77) (1.49) (2.05) (.95)
NET ASSET VALUE, END OF YEAR $19.29 $19.76 $19.85 $17.26 $16.44
TOTAL RETURN(1) 12.50% 8.41% 23.88% 17.94% 31.58%
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $2,240,250 $2,290,659 $1,912,802 $1,443,466 $1,158,111
Average net assets (000) $2,217,410 $2,088,616 $1,709,030 $1,233,792 $908,365
RATIOS TO AVERAGE NET ASSETS:
Expenses, including
distribution fees(2) .86% .85% .88% .89% .91%
Expenses, excluding
distribution fees .61% .60% .63% .64% .66%
Net investment income 1.25% 1.41% 1.87% 2.07% 1.82%
Portfolio turnover 9% 25% 13% 19% 18%
</TABLE>
<TABLE>
<S> <C>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES
CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON
THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED.
2 THE DISTRIBUTOR OF THE FUND AGREED TO LIMIT ITS DISTRIBUTION
FEES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS A SHARES.
</TABLE>
- -------------------------------------------------------------------
32 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $19.73 $19.83 $17.24 $16.43 $13.24
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .13 .14 .22 .22 .16
Net realized and unrealized
gain on investments and
foreign currencies 2.12 1.37 3.72 2.51 3.87
TOTAL FROM INVESTMENT
OPERATIONS 2.25 1.51 3.94 2.73 4.03
LESS DISTRIBUTIONS:
Dividends from net investment
income (.11) (.12) (.22) (.22) (.16)
Distributions from net realized
capital gains (2.61) (1.49) (1.13) (1.69) (.68)
Distributions in excess of net
investment income -- -- -- (.01) --
TOTAL DISTRIBUTIONS (2.72) (1.61) (1.35) (1.92) (.84)
NET ASSET VALUE, END OF YEAR $19.26 $19.73 $19.83 $17.24 $16.43
TOTAL RETURN(1) 11.69% 7.55% 23.05% 17.14% 30.62%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $2,351,200 $2,923,060 $3,090,767 $2,626,479 $2,140,895
Average net assets (000) $2,666,269 $3,135,980 $2,924,413 $2,417,900 $1,891,160
RATIOS TO AVERAGE NET ASSETS:
Expenses, including
distribution fees 1.61% 1.60% 1.63% 1.64% 1.66%
Expenses, excluding
distribution fees .61% .60% .63% .64% .66%
Net investment income .49% .66% 1.12% 1.37% .99%
Portfolio turnover 9% 25% 13% 19% 18%
</TABLE>
<TABLE>
<S> <C>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES
CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON
THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED.
</TABLE>
- --------------------------------------------------------------------------------
33
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $19.73 $19.83 $17.24 $16.43 $13.24
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .10 .16 .25 .22 .16
Net realized and unrealized gain on
investments and foreign currencies 2.15 1.35 3.69 2.51 3.87
TOTAL FROM INVESTMENT OPERATIONS 2.25 1.51 3.94 2.73 4.03
LESS DISTRIBUTIONS:
Dividends from net investment income (.11) (.12) (.22) (.22) (.16)
Distributions from net realized
capital gains (2.61) (1.49) (1.13) (1.69) (.68)
Distributions in excess of net
investment income -- -- -- (.01) --
TOTAL DISTRIBUTIONS (2.72) (1.61) (1.35) (1.92) (.84)
NET ASSET VALUE, END OF YEAR $19.26 $19.73 $19.83 $17.24 $16.43
TOTAL RETURN(1) 11.69% 7.55% 23.05% 17.14% 30.62%
- ---------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $82,737 $88,839 $72,244 $47,477 $23,894
Average net assets (000) $86,078 $82,907 $60,434 $36,745 $12,190
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.61% 1.60% 1.63% 1.64% 1.66%
Expenses, excluding distribution fees .61% .60% .63% .64% .66%
Net investment income .50% .67% 1.11% 1.37% 1.03%
Portfolio turnover 9% 25% 13% 19% 18%
</TABLE>
<TABLE>
<S> <C>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES
CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON
THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN ONE YEAR IS
NOT ANNUALIZED.
</TABLE>
- -------------------------------------------------------------------
34 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL PERIODS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996(1)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.76 $19.87 $17.26 $17.10
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .31 .35 .42 .37
Net realized and unrealized gain on
investments and foreign currencies 2.16 1.36 3.72 1.88
TOTAL FROM INVESTMENT OPERATIONS 2.47 1.71 4.14 2.25
LESS DISTRIBUTIONS:
Dividends from net investment income (.32) (.33) (.40) (.39)
Distributions from net realized capital
gains (2.61) (1.49) (1.13) (1.69)
Distributions in excess of net
investment income -- -- -- (.01)
TOTAL DISTRIBUTIONS (2.93) (1.82) (1.53) (2.09)
NET ASSET VALUE, END OF PERIOD $19.30 $19.76 $19.87 $17.26
TOTAL RETURN(2) 12.81% 8.56% 24.29% 13.65%
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996(1)
- ------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $304,906 $307,921 $267,121 $128,752
Average net assets (000) $302,528 $311,816 $57,646 $124,631
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees .61% .60% .63% .64%(3)
Expenses, excluding distribution fees .61% .60% .63% .64%(3)
Net investment income 1.50% 1.67% 2.11% 2.43%(3)
Portfolio turnover 9% 25% 13% 19%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 3-1-96 (WHEN CLASS Z
SHARES WERE FIRST OFFERED) THROUGH 12-31-96.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES
CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON
THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN ONE YEAR IS
NOT ANNUALIZED.
3 ANNUALIZED.
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Please read the prospectus carefully before you invest or
send money.
STOCK FUNDS
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE FUND
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
PRUDENTIAL GLOBAL GROWTH FUND
PRUDENTIAL INTERNATIONAL VALUE FUND
PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
- -------------------------------------------------------------------
36 PRUDENTIAL EQUITY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
- -------------------------------------
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
TARGET FUNDS
TOTAL RETURN BOND FUND
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
MASSACHUSETTS MONEY MARKET SERIES
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES
- --------------------------------------------------------------------------------
37
<PAGE>
FOR MORE INFORMATION
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906-5005
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)
Outside Brokers should contact
Prudential Investment Management
Services LLC
P.O. Box 15035
New Brunswick, NJ 08906-5035
(800) 778-8769
Visit Prudential's website at
http://www.prudential.com
Additional information about the Fund can
be obtained without charge and can be
found in the following documents
Statement of Additional Information (SAI)
(incorporated by reference into this prospectus)
Annual Report
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
Semi-Annual Report
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows
BY MAIL
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call
1-202-942-8090)
VIA THE INTERNET
on the EDGAR Database at
http://www.sec.gov
CUSIP Numbers QUOTRON Symbols
Class A Shares--744316-10-0 PBQAX
Class B Shares--744316-20-9 PBQFX
Class C Shares--744316-30-8 PRECX
Class Z Shares--744316-40-7 PEQZX
Investment Company Act File No. 811-3336
MF101A
[RECYCLED LOGO]
Printed on Recycled Paper
<PAGE>
PRUDENTIAL EQUITY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 1, 2000
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 its investment adviser
believes are in sound financial condition and have the potential for price
appreciation greater than broadly-based stock indexes. The Fund may buy and sell
certain derivatives, including options on stock and stock indexes 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 "Description of the Fund, Its Investments and Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated March 1, 2000, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Fund History................................................ B-2
Description of the Fund, Its Investments and Risks.......... B-2
Investment Restrictions..................................... B-16
Management of the Fund...................................... B-17
Control Persons and Principal Holders of Securities......... B-19
Investment Advisory and Other Services...................... B-20
Brokerage Allocation and Other Practices.................... B-24
Capital Shares, Other Securities and Organization........... B-26
Purchase, Redemption and Pricing of Fund Shares............. B-27
Shareholder Investment Account.............................. B-36
Net Asset Value............................................. B-41
Taxes, Dividends and Distributions.......................... B-42
Performance Information..................................... B-44
Financial Statements........................................ B-46
Report of Independent Accountants........................... B-58
Appendix I--General Investment Information.................. I-1
Appendix II--Historical Performance Data.................... II-1
</TABLE>
- --------------------------------------------------------------------------------
MF101B
<PAGE>
FUND HISTORY
The Fund was incorporated in Maryland on October 9, 1981.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Fund is a diversified, open-end, management
investment company.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's investment
objective is long-term growth of capital. While the principal investment
policies and strategies for seeking to achieve this objective are described in
the Fund's Prospectus, the Fund may from time to time also use the securities,
instruments, policies and principal and non-principal strategies described below
in seeking to achieve its objective. The Fund may not be successful in achieving
its objective and you could lose money.
FOREIGN INVESTMENTS
The Fund may invest up to 30% of its total assets in securities of foreign
issuers. American Depositary Receipts (ADRs) and American Depositary Shares
(ADSs) are not considered foreign securities for purposes of the limitation.
Investing in securities of foreign companies and countries involves certain
considerations and risks which are not typically associated with investing in
securities of domestic companies. Foreign companies are not generally subject to
uniform accounting, auditing and financial standards or other requirements
comparable to those applicable to U.S. companies. There may also be less
government supervision and regulation of foreign securities exchanges, brokers
and public companies than exists in the United States. Dividends and interest
paid by foreign issuers may be subject to withholding and other foreign taxes
which may decrease the net return on such investments as compared to dividends
and interest paid to the Fund by domestic companies. There may be the
possibility of expropriations, confiscatory taxation, political, economic or
social instability or diplomatic developments which could affect assets of the
Fund held in foreign countries. In addition, a portfolio of foreign securities
may be adversely affected by fluctuations in the relative rates of exchange
between the currencies of different nations and by exchange control regulations.
There may be less publicly available information about foreign companies and
governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than, for example, the
New York Stock Exchange and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Brokerage
commissions and other transaction costs of foreign securities are generally
higher than in the United States.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES
On January 1, 1999, 11 of the 15 member states of the European Monetary
Union introduced the "euro" as a common currency. During a three-year
transitional period, the euro will coexist with each member state's national
currency. By July 1, 2002, the euro is expected to become the sole legal tender
of the member states. During the transition period, the Fund will treat the euro
as a separate currency from the national currency of any member state.
The adoption by the member states of the euro will eliminate the substantial
currency risk among member states and will likely affect the investment process
and considerations of the Fund's investment adviser. To the extent the Fund
holds non-U.S. dollar-denominated securities, including those denominated in the
euro, the Fund will still be subject to currency risk due to fluctuations in
those currencies as compared to the U.S. dollar.
The medium- to long-term impact of the introduction of the euro in member
states cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general long-term ramifications
can be expected, such as changes in economic environment and changes in behavior
of investors, all of which will impact the Fund's investments.
The Fund's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps are being taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expenses relating to these actions.
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RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return but not for speculation. These strategies include (1) the purchase and
writing (that is, sale) of put options and call options on equity securities,
(2) the purchase and sale of put and call options on indexes, (3) the purchase
and sale of exchange traded stock index futures and options thereon and (4) the
purchase and sale of options on foreign currencies and futures contracts on
foreign currencies and options on such contracts. The Fund may engage in these
transactions on securities of commodities exchanges or, in the case of equity,
stock index and foreign currency options, also in the over-the-counter (OTC)
market. The Fund also may purchase and sell foreign currency forward contracts.
The Fund, and thus its investors, may lose money through any unsuccessful use of
these strategies. The Fund's ability to use these strategies may be limited by
various factors, such as market conditions, regulatory limits and tax
considerations, and there can be no assurance that any of these strategies will
succeed. If new financial products and risk management techniques are developed,
the Fund may use them to the extent they are consistent with its investment
objective and policies.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDEXES,
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 indexes traded
on securities exchanges, on NASDAQ or in the OTC market.
CALL OPTIONS ON STOCK. A call option is a short-term contract (having a
duration of nine months or less) pursuant to which the purchaser, in exchange
for a premium paid, has the right to buy the security underlying the option at a
specified exercise price at any time during the term of the option or, in the
case of a European-style option, at the expiration of the option. The writer of
the call option receives a premium and has the obligation, if the option is
exercised, to deliver the underlying security against payment of the exercise
price. There is no limitation on the amount of call options the Fund may write.
The Fund may write only call options which are "covered," meaning that the
Fund either (1) 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 or
(2) holds on a share-for-share basis a call on the same security as the call
written by the Fund 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, provided the Fund maintains the difference in cash or
other liquid assets in a segregated account with its Custodian. The premium paid
by the purchaser of an option will reflect, among other things, the relationship
of the exercise price to the market price and volatility of the underlying
security, the remaining term of the option, supply and demand and interest
rates. In addition, the Fund will not permit the call to become uncovered prior
to the expiration of the option or the Fund's termination of the option by
effecting 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 on an exchange,
the Fund is required to comply with the rules of The Options Clearing
Corporation (OCC) and the various exchanges with respect to collateral
requirements. 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. A put option is a contract which gives the purchaser,
who pays a premium, the right to sell the underlying security at a specified
price during the term of the option. The writer of the put, who receives the
premium, has the obligation to buy the underlying security upon exercise at the
exercise price. The Fund, as the writer of a put option might, therefore, be
obligated to purchase underlying securities for more than their current market
price. The Fund will purchase put options only when its investment adviser
perceives significant short-term risk, but substantial long-term appreciation in
the underlying security.
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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 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.
An investor who is the holder of an option may liquidate his or her position
by effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that a closing sale transaction can be effected. To secure the
obligation to deliver the underlying security in the case of a call option, the
writer of an exchange-traded option or a NASDAQ option is required to pledge for
the benefit of the broker the underlying security or other assets in accordance
with the rules of the OCC, an institution created to interpose itself between
buyers and sellers of options. Technically, the OCC assumes the other side of
every purchase and sale transaction on an exchange and, by doing so, guarantees
the transaction.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; conversely, the Fund will
realize a loss from a closing transaction if the price of the transaction is
more than the premium received from writing the option or is less than the
premium paid to purchase the option. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
STOCK INDEX OPTIONS. The Fund may purchase and write (that is, sell) put and
call options on stock indexes traded on securities exchanges, on NASDAQ or in
the OTC market. Options on stock indexes are similar to options on stock except
that, rather than the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
index upon which the option is based is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to such difference between the closing price of the index and
the exercise price of the option expressed in dollars times a specified multiple
(the multiplier). The writer of the option is obligated, in return for the
premium received, to make delivery of this amount.
The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per contract
of each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indexes may have
different multipliers.
The value of an index option depends upon movements in the level of the
index rather than the price of a particular stock. Therefore, 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 particular stock. Accordingly, successful use by the Fund of options on
indexes would be subject to the investment adviser's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks. The Fund's investment
adviser currently uses these techniques in conjunction with the management of
other mutual funds.
Unlike stock options, all settlements are in cash, with the result that a
call writer cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. In addition, unless the Fund has other liquid assets
which are sufficient to satisfy the exercise of a call, the Fund would be
required to liquidate portfolio securities or borrow in order to satisfy the
exercise.
The Fund's successful use of options on indexes depends upon the investment
adviser's ability to predict the direction of the market and is subject to
various additional risks. The correlation between movements in the index and the
price of the
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securities being written against is imperfect and the risk from imperfect
correlation increases as the composition of the Fund's portfolio diverges from
the composition of the relevant index. Accordingly, a decrease in the value of
the securities being written against may not be wholly offset by a gain on the
exercise of a stock index put option held by the Fund. Likewise, if a stock
index call option written by the Fund is exercised, the Fund may incur a loss on
the transaction which is not offset, wholly or in part, by an increase in the
value of the securities being written against, which securities may, depending
on market circumstances, decline in value.
Except as described below, the Fund will write call options on indexes 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 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 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 or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will so segregate
or pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when the Fund writes a call on an index which is
in-the-money at the time the call is written, the Fund will segregate with its
Custodian or pledge to the broker as collateral cash or other liquid assets,
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount so segregated 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
segregated with its Custodian, it will not be subject to the requirements
described in this paragraph.
STOCK INDEX FUTURES. A stock index futures contract is an agreement in which
the writer (or seller) of the contract agrees to deliver to the buyer an amount
of cash equal to a specific dollar amount times the difference between the value
of a specific stock index at the close of the last trading day of the contract
and the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. When the futures contract is entered
into, each party deposits with a broker or in a segregated custodial account
approximately 5% of the contract amount, called the "initial margin." Subsequent
payments to and from the broker, called "variation margin," will be made on a
daily basis as the price of the underlying stock index fluctuates, making the
long and short positions in the futures contracts more or less valuable, a
process known as "marked-to-market." The Fund will purchase and sell stock index
futures contracts to reduce certain risks of its investments and to enhance
return in accordance with regulations of the Commodity Futures Trading
Commission (CFTC). 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 segregated 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
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(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. The Fund intends to engage in
futures transactions and options thereon in accordance with the regulations of
the CFTC. The Fund intends to purchase and sell stock index futures and options
thereon as a hedge against changes, resulting from market conditions, in the
value of securities which are held in the Fund's portfolio or which the Fund
intends to purchase. The Fund intends to purchase and sell futures contracts on
foreign currencies and options thereon 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
purchase and sell stock index futures and options thereon and futures contracts
on foreign currencies and options thereon when they are economically appropriate
for the reduction of risks inherent in the ongoing management of the Fund. The
Fund also intends to purchase and sell stock index futures and options thereon
for return enhancement.
The Fund's successful use of futures contracts and option thereon depends
upon the investment adviser's ability to predict the direction of the market and
is subject to various additional risks. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than the related futures contract,
resulting in losses to the Fund. The use of these instruments will hedge only
the currency risks associated with investments in foreign securities, not market
risks. Certain futures exchanges or boards of trade have established daily
limits on the amount that the price of a futures contract or option thereon may
vary, either up or down, from the previous day's settlement price. These daily
limits may restrict the Fund's ability to purchase or sell certain futures
contracts or options thereon on any particular day. In addition, if the Fund
purchases futures to hedge against market advances before it can invest in
common stock in an advantageous manner and the market declines, the Fund might
experience a loss on the futures contract. In addition, the ability of the Fund
to close out a futures position or an option depends on a liquid secondary
market. There is no assurance that at any particular time liquid secondary
markets will exist for any particular futures contract or option thereon.
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.
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The Fund also may purchase a "protective put," that is, a put option
acquired for the purpose of protecting a portfolio security from a decline in
market value. In exchange for the premium paid for the put option, the Fund
acquires the right to sell the underlying security at the exercise price of the
put regardless of the extent to which the underlying security declines in value.
The loss to the Fund is limited to the premium paid for, and transaction costs
in connection with, the put plus the initial excess, if any, of the market price
of the underlying security over the exercise price. However, if the market price
of the security underlying the put rises, the profit the Fund realizes on the
sale of the security will be reduced by the premium paid for the put option less
any amount (net of transaction costs) for which the put may be sold. Similar
principles apply to the purchase of puts on stock indexes 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
investment adviser will take into account the credit quality of counterparties
in order to limit the risk of default by the counterparty.
RISKS OF OPTIONS ON INDEXES
The Fund's purchase and sale of options on indexes will be subject to risks
described above under "Risks of Transactions in Stock Options." In addition, the
distinctive characteristics of options on indexes create certain risks that are
not present with stock options.
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 particular
stock. Accordingly, successful use by the Fund of options on indexes would be
subject to the investment adviser's ability to predict correctly movements in
the direction of the 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 indexes 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 INDEXES
Because exercises of index options are settled in cash, a call writer such
as the Fund cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. However, the Fund will write call options on indexes only
under the circumstances described above under "Limitations on Purchase and Sale
of Stock Options, Options on Stock Indexes, 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
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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 INDEXES
If the Fund holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change causes
the exercised option to fall out-of-the-money, the Fund will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although the
Fund may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff time or by selling rather than exercising an
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely because the cutoff times for index
options may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
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
B-8
<PAGE>
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.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
the investment adviser's predictions of movements in the direction of the
securities, foreign currency or interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of these strategies
include: (1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the risk that the counterparty may be unable to complete the transaction;
and (6) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate assets in
connection with hedging transactions.
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward contracts to protect the
value of its portfolio against future changes in the level of currency exchange
rates. A forward contract on foreign currency is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract, at a price set on the
date of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (typically large commercial banks)
and their customers. A forward contract generally has no deposit requirements,
and no commissions are charged for such trades. 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 (that is, 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.
The Fund may not use forward contracts to generate income, although the use
for such contracts may incidentally generate income. There is no limitation on
the value of forward contracts into which the Fund may enter. However, the
Fund's dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of a forward contract with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest or dividends receivable and
Fund expenses. Position hedging is the sale of foreign currency with respect to
portfolio security positions denominated or quoted in that currency or in a
different foreign currency (cross-hedge). The Fund will not speculate in forward
contracts. The Fund may not position hedge (including cross-hedge) with respect
to a particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of a forward contract) of the
securities being hedged.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when the Fund anticipates the receipt in a
foreign currency of dividends or interest payments on a security which it holds,
the Fund may desire to "lock-in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars, for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, the Fund may be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
B-9
<PAGE>
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. The Fund will not enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the Fund believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Fund will thereby be served. If the Fund enters into a
position hedging transaction, the transaction will be "covered" by the position
being hedged or the Fund's Custodian will segregate cash or other liquid assets
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 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 foreign currency forward 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, they also tend to limit any potential gain which might result should
the value of such currency increase. The Fund's ability to enter into foreign
currency forward contracts may be limited by certain requirements for
qualification as a regulated investment company under the Internal Revenue Code.
See "Taxes, Dividends and Distributions."
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
RISKS OF TRANSACTIONS IN EXCHANGE-TRADED OPTIONS
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for
B-10
<PAGE>
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: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (4) unusual or unforeseen circumstances may interrupt normal operations
on an exchange; (5) the facilities of an exchange or a clearing corporation may
not at all times be adequate to handle current trading volume; or (6) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
the class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result in
the institution by an exchange of special procedures which may interfere with
the timely execution of customers' orders. The Fund intends to purchase and sell
only those options which are cleared by a clearinghouse whose facilities are
considered to be adequate to handle the volume of options transactions.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
The Fund is permitted to purchase and write put and call options on foreign
currencies and on futures contracts on foreign currencies traded on securities
exchanges or boards of trade (foreign and domestic) for hedging purposes in a
manner similar to that in which foreign currency forward contracts and futures
contracts on foreign currencies will be employed. Options on foreign currencies
and on futures contracts on foreign currencies are similar to options on stock,
except that the Fund has the right to take or make delivery of a specified
amount of foreign currency, rather than stock. 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 above under "Risks of Risk Management 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.
The Fund may purchase and write options to hedge the Fund's portfolio
securities denominated in foreign currencies. If there is a decline in the
dollar value of a foreign currency in which the Fund's portfolio securities are
denominated, the dollar value of such securities will decline even though the
foreign currency value remains the same. To hedge against the decline of the
foreign currency, the Fund may purchase put options on futures contracts on such
foreign currency. If the value of the foreign currency declines, the gain
realized on the put option would offset, in whole or in part, the adverse effect
such decline would have on the value of the portfolio securities. Alternatively,
the Fund may write a call option on a futures contract on the foreign currency.
If the value of the foreign currency declines, the option would not be exercised
and the decline in the value of the portfolio securities denominated in such
foreign currency would be offset in part by the premium the Fund received for
the option.
If, on the other hand, the investment adviser anticipates purchasing a
foreign security and also anticipates a rise in the value of such foreign
currency (thereby increasing the cost of such security), the Fund may purchase
call options on the foreign currency. The purchase of such options could offset,
at least partially, the effects of the adverse movements of the exchange rates.
Alternatively, the Fund could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.
B-11
<PAGE>
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS ON FOREIGN CURRENCIES
The Fund may buy and sell futures contracts on foreign currencies and
purchase and write options thereon for hedging and risk management purposes. The
Fund will engage in transactions in only those futures contracts and options
thereon that are traded on a commodities exchange or a board of trade. A "sale"
of a futures contract on foreign currency means the assumption of a contractual
obligation to deliver the specified amount of foreign currency at a specified
price in a specified future month. A "purchase" of a futures contract means the
assumption of a contractual obligation to acquire the currency called for by the
contract at a specified price in a specified future month. At the time a futures
contract is purchased or sold, the Fund must allocate cash or securities as a
deposit payment (initial margin). Thereafter, the futures contract is
marked-to-market daily.
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 investment adviser 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.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's Manager or investment adviser to predict correctly
movements in the direction of markets and other factors affecting currencies
generally. For example, if the Fund has hedged against the possibility of an
increase in the price of securities in its portfolio and price of such
securities increases instead, the Fund will lose part or all of the benefit of
the increased value of its securities because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash to meet daily variation margin requirements, it may need to
sell securities to meet such requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous to do
so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.
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.
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.
B-12
<PAGE>
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.
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 other liquid assets or obtains an irrevocable letter of credit in favor of
the Fund equal to at least 100% of the market 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.
SEGREGATED ASSETS
The Fund segregates with its Custodian, State Street Bank and Trust Company,
cash, U.S. government securities, equity securities (including foreign
securities), debt securities or other liquid, unencumbered assets equal in value
to its obligations in respect of potentially leveraged transactions. These
include forward contracts, when-issued and delayed delivery securities, futures
contracts, written options and options on futures contracts (unless otherwise
covered). If collateralized or otherwise covered, in accordance with Securities
and Exchange Commission (Commission) guidelines, these will not be deemed to be
senior securities. The assets segregated will be marked-to-market daily.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will segregate cash or other liquid assets having a value equal
to or greater than the Fund's purchase commitments. The securities so purchased
are subject to market fluctuation and no interest accrues to the purchaser
during the period between purchase and settlement. At the time of delivery of
the securities, the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
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<PAGE>
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open, the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for,
without payment of any further consideration, an equal amount of the securities
of the same issuer as the securities sold short (a short sale against-the-box),
and that not more than 25% of the Fund's net assets (determined at the time of
the short sale) may be subject to such sales.
BORROWING
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 its total assets
to secure these borrowings. If the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action (within 3 days) to reduce its
borrowings. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually quite short, possibly
overnight or a few days, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss.
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's investment adviser. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. On a daily basis, any uninvested cash balances of
the Fund may be aggregated with those of such investment companies and invested
in one or more repurchase agreements. Each fund participates in the income
earned or accrued in the joint account based on the percentage of its
investment.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities. If the
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets, as required by applicable law. Illiquid securities include
repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Repurchase agreements subject to
demand are deemed to have a maturity equal to the applicable notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
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<PAGE>
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. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Board of Directors. The Fund's investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. The investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Directors. In reaching liquidity decisions, the investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (a) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSROs), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (b) it must not be "traded
flat" (that is, without accrued interest) or in default as to principal or
interest.
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 Commission 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."
(d) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, or pending investment of
proceeds from sales of the Fund's shares, the Fund may invest in money market
instruments, including commercial paper of domestic corporations, certificates
of deposit, bankers' acceptances and other obligations of domestic banks
(including foreign branches), and obligations issued or guaranteed by the U.S.
government, its instrumentalities or its agencies or a foreign government.
Investments in foreign branches of domestic banks may be subject to certain
risks, including future political and economic developments, the possible
imposition of withholding taxes on interest income, the seizure or
nationalization of foreign deposits and foreign exchange controls or other
restrictions.
(e) 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 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. If 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. High portfolio turnover may also mean that a
proportionately greater amount of distributions to shareholders will be taxed as
ordinary income rather than long-term capital gains compared to investment
companies with lower portfolio turnover. See "Brokerage Allocation and Other
Practices" and "Taxes, Dividends and Distributions."
B-15
<PAGE>
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 (1) 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 (2) 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 foreign
currency forward contracts and collateral arrangements with respect to the
purchase and sale of options, futures contracts, options on futures contracts
and foreign currency forward 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 foreign currency forward 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 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.
B-16
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH THE FUND DURING PAST FIVE YEARS
- ------------------------ ------------- ----------------------
<S> <C> <C>
Delayne Dedrick Gold (61) Director Marketing and Management Consultant.
*Robert F. Gunia (53) Vice President Executive Vice President and Chief Administrative
and Director Officer (since June 1999) of Prudential
Investments; Corporate Vice President (since
September 1997) of Prudential Investments;
Executive Vice President and Treasurer (since
December 1996), Prudential Investments Fund
Management LLC (PIFM); President (since April 1999)
Prudential Investment Management Services LLC
(PIMS); formerly Senior Vice President (March
1987-May 1999) of Prudential Securities
Incorporated (Prudential Securities) and Chief
Administrative Officer (July 1990-September 1996),
Director (January 1989-September 1996), and
Executive Vice President, Treasurer and Chief
Financial Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.
Douglas H. McCorkindale (60) Director Vice Chairman (since March 1984) and President
(since September 1997) of Gannett Co. Inc.
(publishing and media); Director of Gannett Co.
Inc., Continental Airlines, Inc. and Global
Crossing Ltd.
Thomas T. Mooney (58) Director President of Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; Former
Deputy Monroe County Executive; Trustee of Center
for Governmental Research, Inc.; Director of Blue
Cross of Rochester, Monroe County Water Authority
and Executive Service Corps of Rochester.
Stephen P. Munn (57) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive Officer
(1988-December 1993) of Carlisle Companies
Incorporated (manufacturer of industrial products).
*David R. Odenath, Jr. (42) Vice President Officer in Charge, President, Chief Executive
and Director Officer and Chief Operating Officer (since
June 1999), PIFM; Senior Vice President (since
June 1999), Prudential; formerly Senior Vice
President (August 1993-May 1999), PaineWebber
Group, Inc.
Richard A. Redeker (56) Director Formerly President, Chief Executive Officer and
Director (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).
Robin B. Smith (60) 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, Texaco Inc.,
Spring Industries Inc. and Kmart Corporation.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH THE FUND DURING PAST FIVE YEARS
- ------------------------ ------------- ----------------------
<S> <C> <C>
*John R. Strangfeld, Jr. President and Director Chief Executive Officer, Chairman, President and
(45) Director (since January 1990) of The Prudential
Investment Corporation, Executive Vice President
(since February 1998), Prudential Global Asset
Management Group of Prudential, and Chairman (since
August 1989), Pricoa Capital Group; formerly
various positions to Chief Executive Officer
(November 1994-December 1998), Private Asset
Management Group of Prudential and Senior Vice
President (January 1986-August 1989), Prudential
Capital Group, a unit of Prudential.
Louis A. Weil, III (58) Director Chairman (since January 1999), President and Chief
Executive Officer (since January 1996) and Director
(since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996),
Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers, Inc.;
formerly Publisher of Time Magazine (May 1989-March
1991), President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August
1989) and member of the Advisory Board, Chase
Manhattan Bank-Westchester.
Clay T. Whitehead (61) Director President of National Exchange Inc. (new business
development firm) (since May 1983).
Grace C. Torres (40) Treasurer and Principal First Vice President (since December 1996) of PIFM;
Financial and First Vice President (since March 1993) of
Accounting Officer Prudential Securities; formerly First Vice
President (March 1994-September 1996) of Prudential
Mutual Fund Management, Inc.
Stephen M. Ungerman (46) Assistant Treasurer Tax Director (since March 1996) of Prudential
Investments; formerly First Vice President
(February 1993-September 1996) of Prudential Mutual
Fund Management, Inc.
Marguerite E.H. Morrison Secretary Vice President and Associate General Counsel (since
(43) December 1996) of PIFM; Vice President and
Associate General Counsel of Prudential Securities;
formerly Vice President and Associate General
Counsel (June 1991-September 1996) of Prudential
Mutual Fund Management, Inc.
</TABLE>
- ------------------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
affiliation with Prudential Securities, Prudential or PIFM.
** The address of the Directors and officers is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077.
The Fund has Directors who in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Fund's officers who conduct
and supervise the daily business operations of the Fund.
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 75.
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 PIFM
annual compensation of $6,625, in addition to certain out-of-pocket expenses.
The amount of annual compensation paid to each Director may change as a result
of the introduction of additional funds on whose Boards the Director may be
asked to serve.
Directors may receive their Directors' 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
B-18
<PAGE>
the prevailing rate applicable to 90-day U.S. Treasury Bills at the beginning of
each calendar quarter or, pursuant to a Commission exemptive order, at the daily
rate of return of the Fund. Payment of the interest so accrued is also deferred
and becomes payable at the option of the Director. The Fund's obligation to make
payments of deferred Directors' fees, together with interest thereon, is a
general obligation of the Fund.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1999 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 all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended
December 31, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME AND POSITION FROM FUND TO DIRECTORS
- ----------------- ------------ ------------
<S> <C> <C>
Edward D. Beach-Director++........................ $6,625 $142,500(43/70)*
Delayne Dedrick Gold-Director..................... $6,625 $144,500(43/70)*
Robert F. Gunia-Director+......................... -- --
Douglas H. McCorkindale-Director**................ $6,625 $ 80,000(24/49)*
Thomas T. Mooney-Director**....................... $6,625 $129,500(35/75)*
Stephen P. Munn-Director.......................... $6,825 $ 62,250(29/53)*
David R. Odenath, Jr.-Director+................... -- --
Richard A. Redeker-Director....................... $6,625 $ 95,000(29/53)*
Robin B. Smith-Director**......................... $6,625 $ 96,000(32/44)*
John R. Strangfeld, Jr.-President and Director+... -- --
Louis A. Weil, III-Director....................... $6,625 $ 96,000(29/53)*
Clay T. Whitehead-Director........................ $7,050 $ 77,000(38/66)*
</TABLE>
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
** Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1999, includes amounts deferred at the election of
Directors under the Funds' deferred compensation plans. Including accrued
interest, total compensation amounted to $97,916, $135,102 and $156,478 for
Messrs. McCorkindale and Mooney and Ms. Smith, respectively.
+ Interested Directors do not receive compensation from the Fund or any fund in
the Fund Complex.
++ Mr. Beach retired on December 31, 1999.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or contingent deferred
sales charge to a limited group of investors.
As of February 4, 2000, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of common stock of the Fund.
As of February 4, 2000, Prudential Securities was the record holder for
other beneficial owners of 51,353,387 Class A shares (or 46% of the outstanding
Class A shares), 62,667,936 Class B shares (or 54% of the outstanding Class B
shares), 2,683,884 Class C shares (or 65% of the outstanding Class C shares) and
1,105,649 Class Z shares (or 7% 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 4, 2000, the only beneficial owner, directly or indirectly,
of more than 5% of the outstanding shares of any class of common stock was
Marquette Trust Co., TTEE, State of Hawaii Deferred Compensation Plan, Marquette
Trust Company, ATTN Marlene Pavek, 13100 Wayzata Blvd., Minnetonka, MN
55305-1842 which held 4,365,992 Class Z shares (28%).
B-19
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential mutual funds. See "How the
Fund is Managed--Manager" in the Prospectus. As of January 31, 2000, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $74.9 billion and, according to the
Investment Company Institute, as of September 30, 1999, the Prudential mutual
funds were the 20th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent and dividend distribution agent for the Prudential mutual funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM has hired The Prudential Investment Corporation, doing business as
Prudential Investments (PI, the investment adviser or the Subadviser), to
provide subadvisory services to the Fund. PIFM also administers the Fund's
corporate affairs and, in connection therewith, furnishes the Fund with office
facilities, together with those ordinary clerical and bookkeeping services which
are not being furnished by State Street Bank and Trust Company (the Custodian),
the Fund's custodian, and PMFS, the Fund's transfer and dividend disbursing
agent. The management services of PIFM for the Fund are not exclusive under the
terms of the Management Agreement and PIFM is free to, and does, render
management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .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 PIFM, but excluding interest, taxes, brokerage
commissions, distribution fees and litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the Fund's
business) for any fiscal year exceed the lowest applicable annual expense
limitation established and enforced pursuant to the statutes or regulations of
any jurisdiction in which the Fund's shares are qualified for offer and sale,
the compensation due to PIFM will be reduced by the amount of such excess. No
jurisdiction currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PIFM or the
Fund's investment adviser;
(b) all expenses incurred by PIFM 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 investment adviser pursuant to the
subadvisory agreement between PIFM and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the investment adviser, (c) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of providing records
to the Manager in connection with its obligation of maintaining required records
of the Fund and of pricing the Fund's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Fund, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Fund in connection
with its securities transactions, (f) all taxes and corporate fees payable by
the Fund to governmental agencies, (g) the fees of any trade associations of
which the Fund may be a member, (h) the cost of stock certificates representing
shares of the Fund, (i) the cost of fidelity and liability insurance, (j) the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the
B-20
<PAGE>
Commission and the states, 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 PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
For the fiscal years ended December 31, 1999, 1998 and 1997, PIFM received
management fees of $24,100,287, $25,661,934 and $22,440,588, respectively.
PIFM has entered into the Subadvisory Agreement with the Subadviser. The
Subadvisory Agreement provides that the Subadviser will furnish investment
advisory services in connection with the management of the Fund. In connection
therewith, the Subadviser is obligated to keep certain books and records of the
Fund. PIFM continues to have responsibility for all investment advisory services
pursuant to the Management Agreement and supervises the Subadviser's performance
of such services. The Subadviser was reimbursed by PIFM for the reasonable costs
and expenses incurred by the Subadviser in furnishing those services. Effective
January 1, 2000, the Subadviser is paid by PIFM at an annual rate of .250 of 1%
of the Fund's average daily net assets up to $500 million, .226 of 1% of average
daily net assets between $500 million and $1 billion, and .203 of 1% of average
daily net assets over $1 billion.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or the Subadviser upon not more than 60 days' nor
less than 30 days' written notice. The Subadvisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. The Distributor is a subsidiary of
Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares, respectively. The
Distributor 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.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
B-21
<PAGE>
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares.
The Class A Plan provides that (1) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Distributor has contractually agreed to limit its distribution-related fees
payable under the Class A Plan to .25 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending December 31, 2000 and also
contractually limited its distribution-related fees for the fiscal year ended
December 31, 1999 to .25 of 1% of the average daily net assets of the Class A
shares.
For the fiscal year ended December 31, 1999, the Distributor received
payments of $5,543,526 under the Class A Plan and spent approximately $5,543,526
in distributing the Class A shares. This amount was primarily expended for
payment of account servicing fees to financial advisers and other persons who
sell Class A shares. For the fiscal year ended December 31, 1999, the
Distributor also received approximately $910,124 in initial sales charges in
connection with the sale of Class A shares.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B and Class C
Plans provide that (1) up to .25 of 1% of the average daily net assets of the
Class B and Class C shares, respectively, may be paid as a service fee and (2)
up to .75 of 1% (not including the service fee) of the average daily net assets
of the Class B and Class C shares, respectively, may be paid for
distribution-related expenses with respect to the Class B and Class C shares,
respectively (asset-based sales charge). The service fee (.25 of 1% of average
daily net assets) is used to pay for personal service and/or the maintenance of
shareholder accounts. The Distributor also receives contingent deferred sales
charges from certain redeeming shareholders and, with respect to Class C shares,
an initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1999, the Distributor
received $26,662,689 from the Fund under the Class B Plan and spent
approximately $14,134,300 in distributing the Class B shares. It is estimated
that of the latter amount, approximately 0.3% ($37,000) was spent on printing
and mailing of prospectuses to other than current shareholders; 26.4%
($3,730,900) was spent on compensation to broker-dealers for commissions to
representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred for
distribution of Class B shares; and 73.3% ($10,366,400) was spent on the
aggregate of (1) payments of commissions and account servicing fees to financial
advisers (53.9% or $7,617,300) and (2) an allocation on account of overhead and
other branch office distribution-related expenses (19.4% or $2,749,100). The
term "overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities' and Pruco Securities
Corporation's (Prusec's) branch offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of operations
and sales support personnel, utility costs, communications costs and the costs
of stationery and supplies, (b) the costs of client sales seminars,
(c) expenses of mutual fund sales coordinators to promote the sale of Fund
shares and (d) other incidental expenses relating to branch promotion of Fund
sales.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. For the
fiscal year ended December 31, 1999, the Distributor received approximately
$5,458,206 in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1999, the Distributor
received $860,782 from the Fund under the Class C Plan and collectively spent
approximately $880,300 in distributing the Fund's Class C shares. It is
estimated that of the latter amount, approximately 0.1% ($1,100) was spent on
printing and mailing of prospectuses to other than current shareholders; 4.0%
($35,100) was spent on compensation to broker-dealers for commissions to
representatives and other expenses, including an allocation of overhead and
other branch office distribution-related expenses, incurred for distribution of
Class C shares; and 95.9% ($844,100) was spent on the aggregate of (1) payments
of commissions and account servicing fees to financial advisers (89.4% or
$786,700) and (2) an allocation of overhead and other branch office
distribution-related expenses (6.5% or $57,400).
The Distributor also receives initial sales charges and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal year ended December 31, 1999, the Distributor
received approximately $35,566 in contingent deferred sales charges attributable
to Class C shares. For the fiscal year ended December 31, 1999, the Distributor
also received approximately $136,340 in initial sales charges in connection with
the sale of Class C shares.
B-22
<PAGE>
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B and Class C Plan or in any agreement related to
the Plans (Rule 12b-1 Directors), cast in person at a meeting called for the
purpose of voting on such continuance. A Plan may be terminated at any time,
without penalty, by the vote of a majority of the Rule 12b-1 Directors or by the
vote of the holders of a majority of the outstanding shares of the applicable
class of the Fund on not more than 30 days' written notice to any other party to
the Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders of
the applicable class (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 the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons
which distribute shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for the Class A shares as described above. Fee waivers and subsidies will
increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to each class of the
Fund'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.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the
B-23
<PAGE>
maintenance of shareholder account records, the payment of dividends and
distributions and related functions. For these services, PMFS receives an annual
fee of $10.00 per shareholder account, a new account set-up fee of $2.00 for
each manually established shareholder account and a monthly inactive zero
balance account fee of $.20 per shareholder account. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Although the Fund has not experienced any material problems with the services
provided by the Manager, Distributor, Transfer Agent or Custodian as a result of
the change from 1999 to 2000, there remains a possibility that computer software
systems in use might be impaired or unavailable because of the way dates are
encoded and calculated. Such an event could have a negative impact on handling
securities trades, payments of interest and dividends, pricing and account
services. Although, at this time, there can be no assurance that there will be
no future adverse impact on the Fund, the Manager, the Distributor, the Transfer
Agent and the Custodian have advised the Fund that they have completed necessary
changes to their computer systems in connection with the year 2000. The Fund's
service providers (or other securities market participants) may experience
future material problems in connection with the year 2000. The Fund and its
Board have instructed the Fund's principal service providers to monitor and
report year 2000 problems.
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues at some later date which, if
material and not resolved, could have an adverse impact on securities markets
and/or a specific issuer's performance and could result in a decline in the
value of the securities held by the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, options
on such securities and stock indexes 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. Broker-dealers may receive brokerage commissions on Fund
portfolio transactions, including options and the purchase and sale of
underlying securities upon the exercise of options. 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 and U.S. government agency securities may be purchased
directly from the 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, except in accordance
with rules of the Commission. Thus, it will not deal in the over-the-counter
market with Prudential Securities acting as market maker, and it will not
execute a negotiated trade with Prudential Securities if execution involves
Prudential Securities' acting as principal with respect to any part of the
Fund's order.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
efficient execution. The Manager seeks to effect each transaction at a price and
commission that provides the most favorable total cost or proceeds reasonably
attainable in the circumstances. The factors that the Manager may consider in
selecting a particular broker, dealer or futures commission merchant (firms) are
the Manager's knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the portfolio transaction; the
size of the transaction; the desired timing of the trade; the activity existing
and expected in the market for the particular transaction; confidentiality; the
execution, clearance and settlement capabilities of the firms; the availability
of research and research related services provided through such firms; the
Manager's knowledge of the financial stability of the firms; the
B-24
<PAGE>
Manager's knowledge of actual or apparent operational problems of firms; and the
amount of capital, if any, that would be contributed by firms executing the
transaction. Given these factors, the Fund may pay transaction costs in excess
of that which another firm might have charged for effecting the same
transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer data bases, quotation equipment and services, research oriented
computer-software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultants. Such services are used in
connection with some or all of the Manager's investment activities; some of such
services, obtained in connection with the execution of transactions for one
investment account, may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct sufficient
commissions to them to ensure the continued receipt of those services that the
Manager believes provides a benefit to the Fund and its other clients. The
Manager makes a good faith determination that the research and/or service is
reasonable in light of the type of service provided and the price and execution
of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to its clients. The allocation of orders among firms and the commission rates
paid are 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 Commission. This limitation, in the
opinion of the Fund, will not significantly affect the Fund's ability to pursue
its present investment objective. However, in the future in other circumstances,
the Fund may be at a disadvantage because of this limitation in comparison to
other funds with similar objectives but not subject to such limitations.
Subject to the above considerations, Prudential Securities 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 firms in connection with comparable
transactions involving similar securities or futures being purchased or sold on
an exchange or board of trade during a comparable period of time. This standard
would allow Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated firm in a
commensurate arm's-length transaction. Furthermore, the Board of Directors of
the Fund, including a majority of the 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, as amended, 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. 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.
B-25
<PAGE>
The table 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 years ended December 31, 1999.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------
ITEM 1999 1998 1997
---- ---------- ---------- ----------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund................ $2,291,516 $3,452,265 $1,659,584
Total brokerage commissions paid to Prudential Securities... $ 264,017 $ 273,070 $ 186,849
Percentage of total brokerage commissions paid to Prudential
Securities................................................. 11.52% 7.9% 11.26%
</TABLE>
The Fund effected approximately 16.01% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended December 31, 1999. Of the total brokerage commissions paid
during that period, $464,873 (or 20.29%) were paid to firms which provided
research, statistical or other services to the Manager. PIFM has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at December 31, 1999. As of December 31, 1999, the Fund held
securities of ABN AMRO, Inc., in the aggregate amount of $7,137,000; Bear,
Stearns & Co., Inc., in the aggregate amount of $16,653,000; J.P. Morgan
Securities, Inc., in the aggregate amount of $40,637,534; Lehman Brothers, Inc.,
in the aggregate amount of $59,504,687; Morgan Stanley Dean Witter & Co., in the
aggregate amount of $54,730,350; and Salomon Smith Barney, Inc., in the
aggregate amount $8,723,000.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 1 billion shares of common stock, $.01 par
value per share divided into four classes, designated Class A, Class B,
Class C, and Class Z shares, consisting of 250 million shares of Class A common
stock, 250 million shares of Class B common stock, 250 million shares of
Class C common stock and 250 million shares of Class Z common stock. Each class
of shares represents an interest in the same assets of the Fund and is identical
in all respects except that (1) each class is subject to different sales charges
and distribution and/or service fees (except for Class Z shares, which are not
subject to any sales charges and distribution and/or service fees), which may
affect performance, (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature and (5) Class Z shares are offered exclusively for sale to a
limited group of investors. In accordance with the Fund's Articles of
Incorporation, the Directors may authorize the creation of additional series and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Directors may determine. The voting rights of
the shareholders of a series or class can be modified only by the vote of
shareholders of that series or class.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of the Fund is
entitled to its portion of all of the Fund's assets after all debt and expenses
of the Fund have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
Under the Articles of Incorporation, the Directors may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and
B-26
<PAGE>
share purchase, redemption and net asset value procedures) with such
preferences, privileges, limitations and voting and dividend rights as the
Directors may determine. All consideration received by the Fund for shares of
any additional series, and all assets in which such consideration is invested,
would belong to that series (subject only to the rights of creditors of that
series) and would be subject to the liabilities related thereto. Under the
Investment Company Act, shareholders of any additional series of shares would
normally have to approve the adoption of any advisory contract relating to such
series and of any changes in the fundamental investment policies related
thereto.
The Directors have the power to alter the number and the terms of office of
the Directors and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Directors have been elected by the
shareholders of the Fund. The voting rights of shareholders are not cumulative,
so that holders of more than 50 percent of the shares voting can, if they
choose, elect all Directors being selected, while the holders of the remaining
shares would be unable to elect any Directors.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class Z
shares of the Fund are offered to a limited group of investors at NAV without
any sales charges.
PURCHASE BY WIRE
For an initial purchase of shares of the Fund by wire, you must complete an
application and telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, fund and class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company (State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Equity Fund, Inc., specifying on the wire the
account number assigned by PMFS and your name and identifying the class in which
you are eligible to invest (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Equity Fund,
Inc., Class A, Class B, Class C, or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing federal funds. The minimum amount which may be invested by wire
is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
B-27
<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%, Class C* shares are sold with a 1% sales charge, and Class B* and Class Z
shares of the Fund are sold at NAV. Using the Fund's NAV at December 31, 1999,
the maximum offering price of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share...... $19.29
Maximum sales charge (5% of offering price)................. 1.02
------
Maximum offering price to public............................ $20.31
======
CLASS B
Net asset value, offering price and redemption price per
Class B share*............................................. $19.26
======
CLASS C
Net asset value and redemption price per Class C share*..... $19.26
Sales charge (1% of offering price)......................... .19
------
Offering price to public.................................... $19.45
======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share.............................................. $19.30
======
</TABLE>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the
Class B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual
distribution-related fees on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class B or
Class C distribution-related fee on the investment, fluctuations in NAV, the
effect of the return on the investment over this period of time or redemptions
when the CDSC is applicable.
B-28
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge if they meet the required
minimum amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent by:
- Officers of the Prudential mutual funds (including the Fund)
- Employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent
- Employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer
- Prudential, employees and special agents of Prudential and its
subsidiaries are all persons who have retired directly from active service
with Prudential or one of its subsidiaries
- Members of the Board of Directors of Prudential
- Real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent
- Registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer
- Investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase
- Investors in Individual Retirement Accounts, provided the purchase is made
in a directed rollover to such Individual Retirement Account with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution
- Orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (for example,
mutual fund "wrap" or asset allocation programs)
- Orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
B-29
<PAGE>
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 "How to Buy, Sell and Exchange Shares of the
Fund--Reducing or Waiving Class A's Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- An individual
- The individual's spouse, their children and their parents
- The individual's and spouse's Individual Retirement Account (IRA)
- Any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners)
- A trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
- A Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
- One or more employee benefit plans of a company controlled by an
individual.
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 (1) 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 (2) a
client of an unaffiliated registered investment adviser which is a client of a
Prudential Securities financial adviser, if such unaffiliated adviser has
discretion to purchase the Prudential mutual funds for the accounts of his or
her customers but only if the client of such unaffiliated adviser participates
in a market timing program conducted by such unaffiliated adviser; provided such
accounts in the aggregate have assets of at least $15 million invested in the
Prudential mutual funds.
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales 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.
LETTERS OF INTENT. Reduced sales charges also 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 no longer
qualify to purchase Class A shares at NAV by entering into a Letter of Intent.
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential mutual funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent or
its affiliates and through your broker will not be aggregated to determine the
reduced sales charge.
An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. Escrowed Class A shares totaling 5% of the dollar
amount of the Letter of Intent will be held by the Transfer Agent in the name of
the purchaser. The effective date of an Investment Letter of Intent may be
back-dated up to 90 days, in order that any investments made during this 90-day
period, valued at the purchaser's cost, can be applied to the fulfillment of the
Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser is required
to pay the difference
B-30
<PAGE>
between the sales charge otherwise applicable to the purchases made during this
period and sales charge actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain such difference. Investors electing to purchase Class A shares
of the Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of Shares--
Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and (3) investors purchasing shares
through other brokers. This waiver is not available to investors who purchase
shares directly from the Transfer Agent. You must notify the Transfer Agent
directly or through your broker if you are entitled to this waiver and provide
the Transfer Agent with such supporting documents as it may deem appropriate.
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial planners
who have agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services.
B-31
<PAGE>
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
- Current and former Director/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
RIGHTS OF ACCUMULATION
Reduced sales charges are also available through rights of accumulation,
under which an investor or an eligible group of related investors, as described
above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate
the value of their existing holdings of shares of the Fund and shares of other
Prudential mutual funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) to determine the reduced sales charge.
However, the value of shares held directly with the Transfer Agent and through
your broker will not be aggregated to determine the reduced sales charge. Rights
of accumulation may be applied across the classes of the Prudential mutual
funds. However, the value of existing holdings for purposes of determining the
reduced sales charge is calculated using the maximum offering price (NAV plus
maximum sales charge) as of the previous business day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's holdings.
Rights of accumulation are not available to individual participants in any
retirement or group plans.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (that is,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates must be received by the Transfer Agent, the
Distributor or your broker in order for the redemption request to be processed.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor, or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, and your shares
are held directly with the Transfer Agent, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An
B-32
<PAGE>
"eligible guarantor institution" includes any bank, broker, dealer or credit
union. The Transfer Agent reserves the right to request additional information
from, and make reasonable inquiries of, any eligible guarantor institution. For
clients of Prusec, a signature guarantee may be obtained from the agency or
office manager of most Prudential Insurance and Financial Services or Preferred
Services offices. In the case of redemptions from a PruArray Plan, if the
proceeds of the redemption are invested in another investment option of the plan
in the name of the record holder and at the same address as reflected in the
Transfer Agent's records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (4) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the same Fund at the NAV
next determined after the order is received, which must be within 90 days after
the date of the redemption. Any CDSC paid in connection with such redemption
will be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be on a PRO RATA basis.) You must notify the Transfer
Agent, either directly or through the Distributor or your broker, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales Charge"
below. Exercise of the repurchase privilege will generally not affect federal
tax treatment of any gain realized upon redemption. However, if the redemption
was made within a 30 day period of the repurchase and if the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, may not
be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase (one year in the case of shares purchased
before November 2, 1998) will be subject to a 1% CDSC. The CDSC will be deducted
from the redemption proceeds and reduce the amount paid to you. The CDSC will be
imposed on any redemption by you which reduces the current value of your Class B
or Class C shares to an amount which is lower than the amount of all payments by
you for shares during the preceding six years, in the case of Class B shares,
and 18 months, in the case of Class C shares (one year for Class C shares
purchased before November 2, 1998). A CDSC will be applied on the lesser of the
original purchase price or the current value of the shares being redeemed.
Increases in the value of your shares or shares acquired through reinvestment of
dividends or distributions are not subject to a CDSC. The amount of any CDSC
will be paid to and retained by the Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any
B-33
<PAGE>
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to
redemption of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------ ----------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Class B shares made during the preceding six years (five years
for Class B shares purchased prior to January 22, 1990) and 18 months for
Class C shares (one year for Class C shares bought before November 2, 1998);
then of amounts representing the cost of shares held beyond the applicable CDSC
period; then of amounts representing the cost of shares bought before July 1,
1985; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decide to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain, or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
at the time of death or initial determination of disability, provided that the
shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential mutual funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
B-34
<PAGE>
You must notify the Fund's Transfer Agent either directly or through your
broker at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability--An individual will be 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 (a copy of the trust agreement
death or to be of long-continued and identifying the grantor will be required as
indefinite duration. well)) is permanently disabled. The letter
must also indicate the date of disability.
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 OVER $1
PAYMENT MADE $500,001 TO $1 MILLION 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 Distributor or 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-35
<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions)(the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which 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. There is no charge to the investor for issuance of a
certificate. The Fund makes available to its shareholders the following
privileges and plans.
B-36
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value per share. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends 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 broker.
Any shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividend or distribution at NAV by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
reinvestment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Shares purchased with reinvested
dividends and/or distributions will not be subject to any CDSC upon redemption.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to 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 the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
mutual funds, the Exchange Privilege is available for those funds eligible for
investment in 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.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates must be returned in order for the
shares to be exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
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.
B-37
<PAGE>
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. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a result of 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 without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of the month), the entire month will
be included in the CDSC holding period. Conversely, if shares are exchanged into
a money market fund prior to the last day of the month (and are held in the
money market fund on the last day of the month), the entire month will be
excluded from the CDSC holding period. For purposes of calculating the seven
year holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV, and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of
B-38
<PAGE>
payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities, Prusec or another broker that they are
eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following separation
from service (that is, voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on 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............. $ 105 $ 158 $ 210 $ 263
20 Years............. 170 255 340 424
15 Years............. 289 438 578 722
10 Years............. 547 820 1,093 1,366
5 Years............. 1,361 2,041 2,721 3,402
See "Automatic Investment Plan."
</TABLE>
- ------------------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of 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 INVESTMENT PLAN (AIP)
Under AIP, 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
brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The investor's
bank must be a member of the Automatic Clearing House System. Share certificates
are not issued to AIP participants.
B-39
<PAGE>
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. The withdrawal plan provides for
monthly, quarterly, semi-annual or annual redemption checks in any amount,
except as provided below, up to the value of the shares in the shareholder's
account. Withdrawals of Class B or Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and
(3) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan.
The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to (1)
the purchase of Class A and Class C shares and (2) the redemption of Class B and
Class C shares. Each shareholder should consult his or her own tax adviser with
regard to the tax consequences of the 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-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, their administration, custodial fees and other
details are available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, 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 a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.
B-40
<PAGE>
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential mutual funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. 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 financial adviser
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Fund will compute its NAV 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 NAV. In the event
the New York Stock Exchange closes early on any business day, the NAV of the
Fund's shares shall be determined at the time between such closing and 4:15
P.M., New York time. The New York Stock Exchange is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with 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 indexes) are valued at the
last sale price on such exchange system on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices on such day
or at the bid price on such day in the absence of an asked price. Corporate
bonds (other than convertible debt securities) and U.S. government securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the basis
of valuations provided by an independent pricing agent or principal market maker
which uses information with respect to transactions in bonds, quotations from
bond dealers, agency ratings, market transactions in comparable securities and
various relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
markers. Options on stock and stock indexes traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange or
board of trade or, if there was no sale on the applicable commodities exchange
or board of trade on such day, at the mean between the most recently quoted bid
and asked prices on such exchange or board of trade. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
current rate obtained from a recognized bank or dealer, and foreign currency
forward contracts are valued at the current cost of covering or offsetting such
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 reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser,
including its portfolio manager, traders, and its research and credit analysts
on the basis of the following factors: cost of the security, transactions in
comparable securities, relationships among various securities and such other
factors as may be determined by the Manager, Subadviser, Board of Directors or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at
B-41
<PAGE>
cost, with interest accrued or discount amortized to the date of maturity, if
their original maturity was 60 days or less, unless this is determined by the
Board of Directors not to represent fair value. Short-term securities with
remaining maturities of more than 60 days, for which market quotations are
readily available, are valued at their current market quotations as supplied by
an independent pricing agent or principal market maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of Class A, Class B
or Class C shares as a result of the fact that 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.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund is qualified as, intends to remain qualified as and has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. This relieves the Fund (but not its shareholders) from paying
federal income tax on income and capital gains which are distributed to
shareholders, and permits net capital gains of the Fund (that is, the excess of
net long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in the Fund. Net capital gains of the Fund which are
available for distribution to shareholders will be computed by taking into
account any capital loss carryforward of the Fund.
Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that the Fund (a) derive at
least 90% of its annual gross income (without reduction for losses from the sale
or other disposition of securities or foreign currencies) from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or options thereon or foreign currencies, or
other income (including, but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the value of the Fund's assets
is represented by cash, U.S. government securities and other securities limited,
in respect of any one issuer, to an amount not greater than 5% of the value of
the Fund's assets and 10% of the outstanding voting securities of such issuer
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. government securities); and
(c) distribute to its shareholders at least 90% of its net investment income and
net short-term capital gains (that is, the excess of net short-term capital
gains over net long-term capital losses) in each year.
In addition, the Fund is required to distribute 98% of its ordinary income
in the same calendar year in which it is earned. The Fund is also required to
distribute during the calendar year 98% of the capital gain net income it earned
during the twelve months ending on October 31 of such calendar year. In
addition, the Fund must distribute during the calendar year all undistributed
ordinary income and undistributed capital gain net income from the prior
calendar year or the twelve-month period ending on October 31 of such prior
calendar year, respectively. To the extent it does not meet these distribution
requirements, the Fund will be subject to a non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the Fund
pays income tax is treated as distributed.
Gains or losses on sales of securities by the Fund generally will be treated
as long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund on securities lapses or
is terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize short-term capital
gain or loss. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. Certain of the Fund's transactions may be subject to wash
sale, short sale, constructive sale, anti-conversion and straddle provisions of
the Internal Revenue Code that may, among other things, require the Fund to
defer recognition of losses. In addition, debt securities acquired by the Fund
may be subject to original issue discount and market discount rules which,
respectively, may cause the Fund to accrue income in advance of the receipt of
cash with respect to interest or cause gains to be treated as ordinary income.
B-42
<PAGE>
Special rules apply to most options on stock indexes, futures contracts and
options thereon, and foreign currency forward contracts in which the Fund may
invest. These investments will generally constitute Section 1256 contracts and
will be required to be "marked to market" for federal income tax purposes at the
end of the Fund's taxable year; that is, treated as having been sold at market
value. Except with respect to certain foreign currency forward contracts, 60% of
any gain or loss recognized on these deemed sales and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indexes will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, the Fund may be required to defer the
recognition of losses on positions it holds to the extent of any unrecognized
gain on offsetting positions held by the Fund.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on foreign currency
forward contracts or dispositions of debt securities denominated in a foreign
currency attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Internal Revenue Code as "Section 988" gains or losses, increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any taxable ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend, thereby
reducing each shareholder's basis in his or her Fund shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. In addition, dividends and capital gains
distributions may also be subject to state and local income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends or capital gains distributions which are expected to be
or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period beginning 30 days before the disposition of shares. Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
gain distributions which are effectively connected with a U.S. trade or business
of the foreign shareholder. Foreign shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences resulting from
their investment in the Fund.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts (described above), and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
B-43
<PAGE>
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares and lower
on Class A shares in relation to Class Z shares. The per share distributions of
net capital gains, if any, will be paid in the same amount for Class A,
Class B, Class C and Class Z shares. See "Net Asset Value."
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or on any gain from disposition of the stock (collectively, PFIC income),
plus interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. This
Fund may make a "mark-to-market" election with respect in any marketable stock
it holds of a PFIC. If the election is in effect, at the end of the Fund's
taxable year the Fund will recognize the amount of gains, if any, as ordinary
income with respect to PFIC stock. No loss will be recognized on PFIC stock,
except to the extent of gains recognized in prior years. Alternatively, the
Fund, if it meets certain requirements, may elect to treat any PFIC in which it
invests as a "qualified electing fund," in which case, in lieu of the foregoing
tax and interest obligation, the Fund will be required to include in income each
year its PRO RATA share of the qualified electing fund's annual ordinary
earnings and net capital gain, even if they are not distributed to the Fund;
those amounts would be subject to the distribution requirements applicable to
the Fund described above.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary.
Shareholders are advised to consult their own tax advisers with respect to
the federal, state and local tax consequences resulting from their investment in
the Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV =Ending Redeemable Value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of
the 1, 5 or 10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes for
the periods ended December 31, 1999.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
-------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Class A 6.87% 17.37% N/A 14.96% (1/22/90)
Class B 6.69 17.61 14.00% 16.17 (3/15/82)
Class C 9.57 17.48 N/A 16.04 (8/1/94)
Class Z 12.81 N/A N/A 15.37 (3/1/96)
</TABLE>
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.
B-44
<PAGE>
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
<TABLE>
<S> <C>
ERV - P
T = -------
P
</TABLE>
Where: P = a hypothetical initial payment of $1000.
T = aggregate total return.
ERV =Ending Redeemable Value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return 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.
Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
-------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Class A 12.50% 134.46% N/A 320.76% (1/22/90)
Class B 11.69 126.02 270.83% 1343.20 (3/15/82)
Class C 11.69 126.02 N/A 126.04 (8/1/94)
Class Z 12.81 N/A N/A 73.00 (3/1/96)
</TABLE>
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of these
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Fund shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed-income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
Set forth below is a chart which compares the performance of different types
of investments over the long term and the rate of inflation.(1)
EDGAR REPRESENTATION OF CHART
PERFORMANCE COMPARISON OF
DIFFERENT TYPES OF INVESTMENTS OVER THE LONG TERM
(12/31/1925-12/31/1999)
COMMON STOCKS--11.4%
LONG-TERM GOV'T BONDS--5.1%
INFLATION--3.1%
(1) Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-45
<PAGE>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL EQUITY FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--96.8%
COMMON STOCKS
- ------------------------------------------------------------
Aluminum--2.8%
1,670,000 Alcoa, Inc. $ 138,610,000
- ------------------------------------------------------------
Apparel--0.4%
641,808 Jones Apparel Group, Inc.(a) 17,409,042
- ------------------------------------------------------------
Automobiles & Trucks--1.5%
377,422 Delphi Automotive Systems Corp. 5,944,396
540,000 General Motors Corp. 39,251,250
404,800 Navistar International Corp.(a) 19,177,400
248,800 PACCAR, Inc. 11,024,950
--------------
75,397,996
- ------------------------------------------------------------
Banks & Financial Services--8.4%
1,473,134 Bank of America Corp. 73,932,913
1,884,300 Bank of New York Co., Inc. 75,372,000
315,200 Chase Manhattan Corp. 24,487,100
1,182,601 Citigroup, Inc. 65,708,268
196,500 J.P. Morgan & Co., Inc. 24,881,813
609,000 Lehman Brothers Holdings, Inc. 51,574,687
139,612 Mellon Financial Corp. 4,755,534
384,750 Mercantile Bankshares Corp. 12,287,953
383,400 Morgan Stanley Dean Witter & Co. 54,730,350
450,000 Republic New York Corp. 32,400,000
--------------
420,130,618
- ------------------------------------------------------------
Chemicals--1.0%
828,800 Eastman Chemical Co. 39,523,400
506,900 Wellman, Inc. 9,441,013
--------------
48,964,413
- ------------------------------------------------------------
Computer Hardware--6.5%
2,973,350 Compaq Computer Corp. 80,466,284
977,000 Hewlett-Packard Co. 111,316,938
2,773,900 Seagate Technology, Inc.(a) 129,159,719
--------------
320,942,941
Construction & Housing--0.5%
1,100,000 Centex Corp. $ 27,156,250
- ------------------------------------------------------------
Diversified Consumer Products--3.8%
750,000 Gibson Greetings, Inc.(a) 6,726,562
1,600,000 Loews Corp. 97,100,000
3,360,000 Nabisco Group Holdings Corp. 35,700,000
2,147,900 Sara Lee Corp. 47,388,044
--------------
186,914,606
- ------------------------------------------------------------
Diversified Manufacturing--0.8%
900,000 American Standard Companies,
Inc.(a) 41,287,500
- ------------------------------------------------------------
Electronics--4.8%
1,937,700 Arrow Electronics, Inc.(a) 49,169,137
776,300 Avnet, Inc. 46,966,150
2,544,000 Harris Corp. 67,893,000
465,000 Hitachi, Ltd., ADR (Japan) 75,271,875
--------------
239,300,162
- ------------------------------------------------------------
Fertilizers--0.3%
350,000 Potash Corp. of Saskatchewan, Inc.
(Canada) 16,865,625
- ------------------------------------------------------------
Funeral Services--0.4%
3,065,900 Service Corp. International(a) 21,269,681
- ------------------------------------------------------------
Health Care--13.1%
5,191,300 Columbia/HCA Healthcare Corp. 152,169,981
4,270,940 Foundation Health Systems, Inc.(a) 42,442,466
4,359,700 HEALTHSOUTH Corp.(a) 23,433,388
273,226 LifePoint Hospitals, Inc.(a) 3,227,482
963,600 PacifiCare Health Systems, Inc.(a) 51,070,800
6,269,574 Tenet Healthcare Corp.(a) 147,334,989
273,226 Triad Hospitals, Inc.(a) 4,132,543
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL EQUITY FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Health Care (cont'd.)
1,623,500 United HealthCare Corp. $ 86,248,438
2,157,600 Wellpoint Health Networks, Inc.(a) 142,266,750
--------------
652,326,837
- ------------------------------------------------------------
Hotels & Leisure--0.8%
3,111,700 Hilton Hotels Corp. 29,950,113
967,200 Park Place Entertainment Corp.(a) 12,090,000
--------------
42,040,113
- ------------------------------------------------------------
Industrial Technology--0.1%
250,200 Gerber Scientific, Inc. 5,488,763
- ------------------------------------------------------------
Insurance--8.3%
552,800 American Financial Group, Inc. 14,580,100
648,164 American General Corp. 49,179,444
1,962,400 AXA Financial, Inc. 66,476,300
1,891,600 Chubb Corp. 106,520,725
2,805,363 Old Republic International Corp. 38,223,071
2,600,700 SAFECO Corp. 64,692,412
1,144,400 St. Paul Companies, Inc. 38,551,975
589,400 Tokio Marine & Fire Insurance Co.,
Ltd., ADR (Japan) 34,848,275
--------------
413,072,302
- ------------------------------------------------------------
Metals-Non Ferrous--3.3%
3,461,100 Freeport-McMoRan Copper & Gold,
Inc. (Class A)(a) 64,246,669
487,000 Freeport-McMoRan Copper & Gold,
Inc. (Class B)(a) 10,287,875
2,758,800 Newmont Mining Corp. 67,590,600
342,335 Phelps Dodge Corp. 22,979,237
--------------
165,104,381
- ------------------------------------------------------------
Office Equipment & Supplies--0.8%
4,566,000 IKON Office Solutions, Inc. 31,105,875
2,544,000 Lanier Worldwide, Inc.(a) 9,858,000
--------------
40,963,875
Oil & Gas Exploration/Production--5.6%
300,000 Amerada Hess Corp. $ 17,025,000
912,100 Atlantic Richfield Co. 78,896,650
562,319 Kerr-McGee Corp. 34,863,778
1,100,000 Occidental Petroleum Corp. 23,787,500
1,744,770 Total Fina S.A., ADR (France) 120,825,322
--------------
275,398,250
- ------------------------------------------------------------
Paper & Forest Products--13.4%
643,900 Fort James Corp. 17,626,763
2,832,500 Georgia-Pacific Corp. 143,749,375
1,046,000 Georgia-Pacific Corp. (Timber
Group) 25,757,750
1,616,000 International Paper Co. 91,203,000
2,047,000 Mead Corp. 88,916,562
752,500 Rayonier, Inc. 36,355,156
1,101,500 Temple-Inland, Inc. 72,630,156
1,260,000 Weyerhaeuser Co. 90,483,750
2,112,100 Willamette Industries, Inc. 98,080,644
--------------
664,803,156
- ------------------------------------------------------------
Photography--3.3%
2,501,400 Eastman Kodak Co. 165,717,750
- ------------------------------------------------------------
Restaurants--2.5%
1,644,200 CKE Restaurants, Inc. 9,659,675
6,457,300 Darden Restaurants, Inc. 117,038,562
--------------
126,698,237
- ------------------------------------------------------------
Retail--6.1%
1,694,800 Consolidated Stores Corp.(a) 27,540,500
3,110,000 Dillard's, Inc. 62,783,125
6,000,000 Kmart Corp.(a) 60,375,000
1,417,300 Pep Boys - Manny, Moe & Jack 12,932,863
625,000 Sears, Roebuck & Co. 19,023,438
1,845,800 Tandy Corp. 90,790,287
2,125,000 Toys 'R' Us, Inc.(a) 30,414,062
--------------
303,859,275
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL EQUITY FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Steel - Producers--0.1%
1,373,300 Birmingham Steel Corp.(a) $ 7,295,656
- ------------------------------------------------------------
Telecommunications--4.2%
876,082 ALLTEL Corp. 72,441,030
1,494,650 AT&T Corp. 75,853,488
2,409,900 Loral Space & Communications,
Ltd.(a) 58,590,694
--------------
206,885,212
- ------------------------------------------------------------
Tobacco--1.3%
1,865,000 Philip Morris Companies, Inc. 43,244,687
1,120,000 R.J. Reynolds Tobacco Holdings,
Inc. 19,740,000
--------------
62,984,687
- ------------------------------------------------------------
Utilities--2.1%
170,000 American Electric Power Co., Inc. 5,461,250
570,000 GPU, Inc. 17,064,375
1,130,448 KeySpan Corp. 26,212,263
974,519 Reliant Energy, Inc. 22,292,122
979,600 Unicom Corp. 32,816,600
--------------
103,846,610
- ------------------------------------------------------------
Waste Management--0.6%
1,580,010 Waste Management, Inc. 27,156,422
--------------
Total long-term investments
(cost $3,581,190,842) 4,817,890,360
--------------
Principal
Amount
(000) Description Value (Note 1)
SHORT-TERM INVESTMENTS--3.5%
- ------------------------------------------------------------
Commercial Paper--2.4%
Baus Funding LLC
$ 25,000 6.20%, 1/31/00 $ 24,870,833
Falcon Asset Securitization Corp.
38,285 Zero Coupon, 1/13/00 38,208,558
5,050 6.13%, 2/3/00 5,021,623
Old Line Funding Corp.
13,734 6.25%, 1/20/00 13,688,697
Windmill Funding Corp.
25,000 6.10%, 1/27/00 24,889,861
11,000 6.11%, 1/28/00 10,949,593
--------------
Total commercial paper
(cost $117,629,165) 117,629,165
--------------
- ------------------------------------------------------------
Repurchase Agreement--1.1%
56,181 Joint Repurchase Agreement
Account,
2.83%, 1/3/00 (Note 5)
(cost $56,181,000) 56,181,000
--------------
Total short-term investments
(cost $173,810,165) 173,810,165
--------------
- ------------------------------------------------------------
Total Investments--100.3%
(cost $3,755,001,007; Note 4) 4,991,700,525
Liabilities in excess of other
assets--(0.3%) (12,608,015)
--------------
Net Assets--100% $4,979,092,510
--------------
--------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1999
<S> <C>
Investments, at value (cost $3,755,001,007)............................................................. $ 4,991,700,525
Cash.................................................................................................... 253,593
Dividends and interest receivable....................................................................... 8,161,355
Receivable for Fund shares sold......................................................................... 3,698,451
Deferred expenses and other assets...................................................................... 104,707
-----------------
Total assets......................................................................................... 5,003,918,631
-----------------
Liabilities
Payable for Fund shares reacquired...................................................................... 17,738,475
Distribution fee payable................................................................................ 2,496,785
Management fee payable.................................................................................. 1,886,139
Accrued expenses and other liabilities.................................................................. 1,429,049
Payable for investments purchased....................................................................... 1,076,517
Forward currency contracts - amount payable to counterparties........................................... 172,486
Deferred Directors' fees................................................................................ 26,670
-----------------
Total liabilities.................................................................................... 24,826,121
-----------------
Net Assets.............................................................................................. $ 4,979,092,510
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 2,583,012
Paid-in capital in excess of par..................................................................... 3,623,182,029
-----------------
3,625,765,041
Undistributed net investment income.................................................................. 2,361,582
Accumulated net realized gain on investments......................................................... 114,438,855
Net unrealized appreciation on investments and foreign currencies.................................... 1,236,527,032
-----------------
Net assets, December 31, 1999........................................................................... $ 4,979,092,510
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($2,240,249,990 / 116,129,521 shares of common stock issued and outstanding)...................... $19.29
Maximum sales charge (5% of offering price).......................................................... 1.02
-----------------
Maximum offering price to public..................................................................... $20.31
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($2,351,200,014 / 122,077,524 shares of common stock issued and outstanding)...................... $19.26
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($82,736,964 / 4,295,877 shares of common stock issued and outstanding)........................... $19.26
Sales charge (1% of offering price).................................................................. .19
-----------------
Offering price to public............................................................................. $19.45
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($304,905,542 / 15,798,248 shares of common stock issued and outstanding)......................... $19.30
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
PRUDENTIAL EQUITY FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
Net Investment Income 1999
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $1,135,398).................. $ 99,040,729
Interest................................. 12,280,863
-----------------
Total income.......................... 111,321,592
-----------------
Expenses
Management fee........................... 24,100,287
Distribution fee--Class A................ 5,543,526
Distribution fee--Class B................ 26,662,689
Distribution fee--Class C................ 860,782
Transfer agent's fees and expenses....... 6,780,000
Reports to shareholders.................. 626,000
Registration fees........................ 290,000
Custodian's fees and expenses............ 281,000
Directors' fees and expenses............. 45,000
Audit fee and expenses................... 30,000
Legal fees and expenses.................. 30,000
Miscellaneous............................ 127,903
-----------------
Total expenses........................ 65,377,187
-----------------
Net investment income....................... 45,944,405
-----------------
Realized and Unrealized
Gain (Loss) on Investments and
Foreign Currency Transactions
Net realized gain (loss) on:
Investment transactions.................. 646,667,889
Foreign currency transactions............ (2,950)
-----------------
646,664,939
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments.............................. (97,082,959)
Foreign currencies....................... (173,241)
-----------------
(97,256,200)
-----------------
Net gain on investments and foreign
currencies............................... 549,408,739
-----------------
Net Increase in Net Assets
Resulting from Operations................... $ 595,353,144
-----------------
-----------------
</TABLE>
PRUDENTIAL EQUITY FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income..... $ 45,944,405 $ 55,919,449
Net realized gain on
investments and foreign
currency
transactions........... 646,664,939 668,341,418
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currencies............. (97,256,200) (297,985,109)
----------------- ---------------
Net increase in net assets
resulting from
operations............. 595,353,144 426,275,758
----------------- ---------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................ (28,805,414) (28,885,221)
Class B................ (13,641,876) (17,096,879)
Class C................ (456,451) (476,903)
Class Z................ (4,692,283) (4,978,773)
----------------- ---------------
(47,596,024) (51,437,776)
----------------- ---------------
Distributions from net
realized capital gains
Class A................ (273,294,379) (155,041,927)
Class B................ (312,998,178) (215,519,773)
Class C................ (10,688,756) (6,228,203)
Class Z................ (38,537,773) (22,058,351)
----------------- ---------------
(635,519,086) (398,848,254)
----------------- ---------------
Fund share transactions (net
of share conversions)
(Note 6)
Proceeds from shares
sold................... 4,402,962,271 6,813,992,163
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 655,203,376 431,480,103
Cost of shares
reacquired............. (5,601,791,028) (6,953,915,648)
----------------- ---------------
Net increase (decrease) in
net assets from Fund
share transactions..... (543,625,381) 291,556,618
----------------- ---------------
Total increase (decrease).... (631,387,347) 267,546,346
Net Assets
Beginning of year............ 5,610,479,857 5,342,933,511
----------------- ---------------
End of year (a).............. $ 4,979,092,510 $ 5,610,479,857
----------------- ---------------
----------------- ---------------
- ---------------
(a) Includes undistributed
net investment income.... $ 2,361,582 $ 4,016,752
----------------- ---------------
----------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
Prudential Equity Fund, Inc. (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The investment objective of the Fund is long-term growth of capital. The Fund
invests primarily in common stocks of major, established corporations.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Securities traded on an exchange and NASDAQ National
Market System securities are valued at the last reported sales price on the
exchange or system on which they are traded or, if no sale was reported on that
date, at the mean between the last reported bid and asked prices or at the bid
price on such day in the absence of an asked price. Securities traded in the
over-the-counter market (including securities listed on exchanges whose primary
market is believed to be over-the-counter) are value by an independent pricing
agent or principal market maker. Short-term securities which mature in more than
60 days are valued based at current market quotations. Short-term securities
which mature in 60 days or less are valued at amortized cost. Securities for
which reliable market quotations are not readily available are valued by the
Valuation Committee based upon procedures adopted by the Board of Directors in
consultation with the manager or subadviser.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements, as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rate of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the year. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of portfolio securities sold during
the year.
Net realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from sales and maturities of short-term
securities, disposition of foreign currency, gains or losses realized between
the trade and settlement dates of security transactions, and the difference
between amounts of dividends, interest and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at year end exchange rates are reflected as a component
of unrealized appreciation or depreciation on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
- --------------------------------------------------------------------------------
B-51
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Dividends and Distributions: Dividends from net investment income are declared
and paid semi-annually. The Fund will distribute at least annually net capital
gains in excess of capital loss carryforwards, if any. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income and net capital gains, if any, to its
shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income and increase
accumulated net realized gain on investments and foreign currencies by $3,551.
Net investment income, net realized gains and net assets were not affected by
this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the Fund's average daily net assets up to $500 million,
.475 of 1% of the next $500 million of average daily net assets and .45 of 1% of
the Fund's average daily net assets in excess of $1 billion.
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'). The Fund compensates PIMS for distributing and servicing
the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by PIMS. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Class A, Class B and Class C Plans were .25%, 1% and 1%,
respectively, of the average daily net assets of Class A, Class B and Class C
shares for the year ended December 31, 1999.
PIMS has advised the Fund that it has received approximately $910,100 and
$136,300 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended December 31, 1999. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended December 31, 1999, it received
approximately $5,458,200 and $35,600 in contingent deferred sales charges
imposed upon certain redemptions by certain Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the year ended December
31, 1999. The purpose of the agreement is to serve as an alternative source of
funding for capital share redemptions.
- --------------------------------------------------------------------------------
B-52
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended December 31, 1999,
the Fund incurred fees of approximately $5,747,900 for the services of PMFS. As
of December 31, 1999, approximately $485,200 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
For the year ended December 31, 1999, Prudential Securities Incorporated, a
wholly owned subsidiary of The Prudential Insurance Company of America, earned
$264,017 in brokerage commissions from portfolio transactions executed on behalf
of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1999 aggregated $437,959,534 and $667,991,750,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1999 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized appreciation for federal income tax purposes was $1,236,699,518
(gross unrealized appreciation--$1,627,230,044; gross unrealized
depreciation--$390,530,526).
The Fund will elect to treat net currency losses of approximately $177,100
incurred in the two month period ended December 31, 1999 as having been incurred
in the following fiscal year.
At December 31, 1999, the Fund had outstanding forward currency contracts to
sell foreign currencies as follows:
<TABLE>
<CAPTION>
Value at
Forward Currency Settlement Current
Sale Contracts Date Receivable Value Depreciation
- ------------------------ --------------- ----------- ------------
<S> <C> <C> <C>
Japanese Yen,
expiring 3/30/2000 $38,626,821 $38,799,307 $ (172,486)
--------------- ----------- ------------
--------------- ----------- ------------
</TABLE>
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of December 31, 1999, the
Fund had a 7.93% undivided interest in the joint account. The undivided interest
for the Fund represents $56,181,000 in principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:
ABN AMRO, Inc., 2.75%, in the principal amount of $90,000,000, repurchase price
$90,020,625, due 1/3/2000. The value of the collateral including accrued
interest was $91,800,968.
Bear, Stearns & Co., Inc., 2.75%, in the principal amount of $210,000,000,
repurchase price $210,048,125, due 1/3/2000. The value of the collateral
including accrued interest was $221,923,528.
Lehman Brothers, Inc., 2.50%, in the principal amount of $100,000,000,
repurchase price $100,020,833, due 1/3/2000. The value of the collateral
including accrued interest was $101,979,049.
Morgan (J.P.) Securities, Inc., 3.00%, in the principal amount of $120,000,000,
repurchase price $120,030,000, due 1/3/2000. The value of the collateral
including accrued interest was $122,400,783.
Morgan (J.P.) Securities, Inc., 4.50%, in the principal amount of $78,685,000,
repurchase price $78,714,507, due 1/3/2000. The value of the collateral
including accrued interest was $80,259,686.
Salomon Smith Barney, Inc., 2.00%, in the principal amount of $110,000,000,
repurchase price $110,018,333, due 1/3/2000. The value of the collateral
including accrued interest was $112,231,078.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualified to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales charge
and are offered exclusively for sale to a limited group of investors.
There are 1 billion shares of common stock, $.01 par value per share, divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each of which consists of 250 million authorized shares.
- --------------------------------------------------------------------------------
B-53
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ------------ ---------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 177,649,766 $ 3,645,037,492
Shares issued in reinvestment of
dividends...................... 14,887,348 287,460,109
Shares reacquired................ (203,602,465) (4,166,822,984)
------------ ---------------
Net decrease in shares
outstanding before
conversions.................... (11,065,351) (234,325,383)
Shares issued upon conversion
from Class B................... 11,272,942 232,069,406
------------ ---------------
Net increase (decrease) in shares
outstanding.................... 207,591 $ (2,255,977)
------------ ---------------
------------ ---------------
Year ended December 31, 1998:
Shares sold...................... 257,279,581 $ 5,379,932,743
Shares issued in reinvestment of
dividends...................... 8,698,400 174,395,442
Shares reacquired................ (257,576,459) (5,396,913,633)
------------ ---------------
Net increase in shares
outstanding before
conversions.................... 8,401,522 157,414,552
Shares issued upon conversion
from Class B................... 11,176,872 225,279,045
------------ ---------------
Net increase in shares
outstanding.................... 19,578,394 $ 382,693,597
------------ ---------------
------------ ---------------
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 28,723,418 $ 588,852,845
Shares issued in reinvestment of
dividends...................... 16,308,918 313,982,958
Shares reacquired................ (59,782,294) (1,212,006,187)
------------ ---------------
Net decrease in shares
outstanding before
conversions.................... (14,749,958) (309,170,384)
Shares reacquired upon conversion
into Class A................... (11,310,483) (232,069,406)
------------ ---------------
Net decrease in shares
outstanding.................... (26,060,441) $ (541,239,790)
------------ ---------------
------------ ---------------
Year ended December 31, 1998:
Shares sold...................... 57,870,061 $ 1,203,484,100
Shares issued in reinvestment of
dividends...................... 11,185,741 223,571,853
Shares reacquired................ (65,658,297) (1,355,114,612)
------------ ---------------
Net increase in shares
outstanding before
conversions.................... 3,397,505 71,941,341
Shares reacquired upon conversion
into Class A................... (11,145,974) (225,279,045)
------------ ---------------
Net decrease in shares
outstanding.................... (7,748,469) $ (153,337,704)
------------ ---------------
------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Amount
- --------------------------------- ------------ ---------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 2,648,837 $ 54,352,108
Shares issued in reinvestment of
dividends...................... 555,178 10,671,295
Shares reacquired................ (3,410,316) (69,046,229)
------------ ---------------
Net decrease in shares
outstanding.................... (206,301) $ (4,022,826)
------------ ---------------
------------ ---------------
Year ended December 31, 1998:
Shares sold...................... 3,508,923 $ 72,836,611
Shares issued in reinvestment of
dividends...................... 328,636 6,521,538
Shares reacquired................ (2,977,095) (61,439,724)
------------ ---------------
Net increase in shares
outstanding.................... 860,464 $ 17,918,425
------------ ---------------
------------ ---------------
<CAPTION>
Class Z
- ---------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 5,576,859 $ 114,719,826
Shares issued in reinvestment of
dividends...................... 2,230,904 43,089,014
Shares reacquired................ (7,591,295) (153,915,628)
------------ ---------------
Net increase in shares
outstanding.................... 216,468 $ 3,893,212
------------ ---------------
------------ ---------------
Year ended December 31, 1998:
Shares sold...................... 7,643,141 $ 157,738,709
Shares issued in reinvestment of
dividends...................... 1,343,793 26,991,270
Shares reacquired................ (6,851,762) (140,447,679)
------------ ---------------
Net increase in shares
outstanding.................... 2,135,172 $ 44,282,300
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-54
<PAGE>
Financial Highlights PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year........................ $ 19.76 $ 19.85 $ 17.26 $ 16.44 $ 13.24
---------- ---------- ---------- ---------- ----------
Income from investment
operations
Net investment income.......... .26 .31 .38 .35 .27
Net realized and unrealized
gain on investments and
foreign currencies.......... 2.15 1.37 3.70 2.52 3.88
---------- ---------- ---------- ---------- ----------
Total from investment
operations............... 2.41 1.68 4.08 2.87 4.15
---------- ---------- ---------- ---------- ----------
Less distributions
Dividends from net investment
income...................... (.27) (.28) (.36) (.35) (.27)
Distributions in excess of net
investment income........... -- -- -- (.01) --
Distributions from net realized
capital gains............... (2.61) (1.49) (1.13) (1.69) (.68)
---------- ---------- ---------- ---------- ----------
Total distributions......... (2.88) (1.77) (1.49) (2.05) (.95)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year... $ 19.29 $ 19.76 $ 19.85 $ 17.26 $ 16.44
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN(a):............... 12.50% 8.41% 23.88% 17.94% 31.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)....................... $2,240,250 $2,290,659 $1,912,802 $1,443,466 $1,158,111
Average net assets (000)....... $2,217,410 $2,088,616 $1,709,030 $1,233,792 $ 908,365
Ratios to average net assets:
Expenses, including
distribution fees........ .86% .85% .88% .89% .91%
Expenses, excluding
distribution fees........ .61% .60% .63% .64% .66%
Net investment income....... 1.25% 1.41% 1.87% 2.07% 1.82%
For Class A, B, C and Z shares:
Portfolio turnover.......... 9% 25% 13% 19% 18%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55
<PAGE>
Financial Highlights PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year........................ $ 19.73 $ 19.83 $ 17.24 $ 16.43 $ 13.24
---------- ---------- ---------- ---------- ----------
Income from investment
operations
Net investment income.......... .13 .14 .22 .22 .16
Net realized and unrealized
gain on investments and
foreign currencies.......... 2.12 1.37 3.72 2.51 3.87
---------- ---------- ---------- ---------- ----------
Total from investment
operations............... 2.25 1.51 3.94 2.73 4.03
---------- ---------- ---------- ---------- ----------
Less distributions
Dividends from net investment
income...................... (.11) (.12) (.22) (.22) (.16)
Distributions in excess of net
investment income........... -- -- -- (.01) --
Distributions from net realized
capital gains............... (2.61) (1.49) (1.13) (1.69) (.68)
---------- ---------- ---------- ---------- ----------
Total distributions......... (2.72) (1.61) (1.35) (1.92) (.84)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year... $ 19.26 $ 19.73 $ 19.83 $ 17.24 $ 16.43
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN(a):............... 11.69% 7.55% 23.05% 17.14% 30.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)....................... $2,351,200 $2,923,060 $3,090,767 $2,626,479 $2,140,895
Average net assets (000)....... $2,666,269 $3,135,980 $2,924,413 $2,417,900 $1,891,160
Ratios to average net assets:
Expenses, including
distribution fees........ 1.61% 1.60% 1.63% 1.64% 1.66%
Expenses, excluding
distribution fees........ .61% .60% .63% .64% .66%
Net investment income....... .49% .66% 1.12% 1.37% .99%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56
<PAGE>
Financial Highlights PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
------------------------------------------------------- ----------------------------------
Year Ended December 31, Year Ended December 31,
------------------------------------------------------- ----------------------------------
1999 1998 1997 1996 1995 1999 1998 1997
------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 19.73 $ 19.83 $ 17.24 $ 16.43 $ 13.24 $ 19.76 $ 19.87 $ 17.26
------- ------- ------- ------- ------- -------- -------- --------
Income from investment
operations
Net investment income.......... .10 .16 .25 .22 .16 .31 .35 .42
Net realized and unrealized
gain on investments and
foreign currencies.......... 2.15 1.35 3.69 2.51 3.87 2.16 1.36 3.72
------- ------- ------- ------- ------- -------- -------- --------
Total from investment
operations............... 2.25 1.51 3.94 2.73 4.03 2.47 1.71 4.14
------- ------- ------- ------- ------- -------- -------- --------
Less distributions
Dividends from net investment
income...................... (.11) (.12) (.22) (.22) (.16) (.32) (.33) (.40)
Distributions in excess of net
investment income........... -- -- -- (.01) -- -- -- --
Distributions from net realized
capital gains............... (2.61) (1.49) (1.13) (1.69) (.68) (2.61) (1.49) (1.13)
------- ------- ------- ------- ------- -------- -------- --------
Total distributions......... (2.72) (1.61) (1.35) (1.92) (.84) (2.93) (1.82) (1.53)
------- ------- ------- ------- ------- -------- -------- --------
Net asset value, end of
period...................... $ 19.26 $ 19.73 $ 19.83 $ 17.24 $ 16.43 $ 19.30 $ 19.76 $ 19.87
------- ------- ------- ------- ------- -------- -------- --------
------- ------- ------- ------- ------- -------- -------- --------
TOTAL RETURN(a):............... 11.69% 7.55% 23.05% 17.14% 30.62% 12.81% 8.56% 24.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $82,737 $88,839 $72,244 $47,477 $23,894 $304,906 $307,921 $267,121
Average net assets (000)....... $86,078 $82,907 $60,434 $36,745 $12,190 $302,528 $311,816 $ 57,646
Ratios to average net assets:
Expenses, including
distribution fees........ 1.61% 1.60% 1.63% 1.64% 1.66% .61% .60% .63%
Expenses, excluding
distribution fees........ .61% .60% .63% .64% .66% .61% .60% .63%
Net investment income....... .50% .67% 1.11% 1.37% 1.03% 1.50% 1.67% 2.11%
<CAPTION>
March 1,
1996(c)
Through
December 31,
1996
------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 17.10
------------
Income from investment
operations
Net investment income.......... .37
Net realized and unrealized
gain on investments and
foreign currencies.......... 1.88
------------
Total from investment
operations............... 2.25
------------
Less distributions
Dividends from net investment
income...................... (.39)
Distributions in excess of net
investment income........... (.01)
Distributions from net realized
capital gains............... (1.69)
------------
Total distributions......... (2.09)
------------
Net asset value, end of
period...................... $ 17.26
------------
------------
TOTAL RETURN(a):............... 13.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $128,752
Average net assets (000)....... $124,631
Ratios to average net assets:
Expenses, including
distribution fees........ .64%(b)
Expenses, excluding
distribution fees........ .64%(b)
Net investment income....... 2.43%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<PAGE>
Report of Independent Accountants PRUDENTIAL EQUITY FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Equity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Equity Fund, Inc. (the
'Fund') at December 31, 1999, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods presented, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards in the United States which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 11, 2000
B-58
<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.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE OF $1.00 INVESTED ON SMALL STOCKS COMMON STOCKS LONG-TERM BONDS TREASURY BILLS INFLATION
1/1/1926 THROUGH 12/31/1999
<S> <C> <C> <C> <C> <C>
1926
1936
1946
1956
1966
1976
1986
1999 $6,640.79 $2,845.63 $40.22 $15.64 $9.40
</TABLE>
Source: Ibbotson Associates. Used with permission. All 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 1989
through 1999. The total returns of the indexes include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and 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>
YEAR 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- ----------------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS(3) 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD
BONDS(4) 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- ----------------------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4
<S> <C>
YEAR 1999
- ---------------------
U.S. GOVERNMENT
TREASURY
BONDS(1) (2.56)%
- ---------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 1.86%
- ---------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS(3) (1.96)%
- ---------------------
U.S. HIGH YIELD
BONDS(4) 2.39%
- ---------------------
WORLD GOVERNMENT
BONDS(5) (5.07)%
- ---------------------
- ---------------------
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT 7.46
</TABLE>
(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year. Source: Lipper Inc.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5)SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1999. It does not represent
the performance of any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (12/31/85 - 12/31/99)
(IN U.S. DOLLARS)
EDGAR REPRESENTATION OF CHART
SWEDEN 22.70%
HONG KONG 20.37%
SPAIN 20.11%
NETHERLAND 18.63%
BELGIUM 18.41%
FRANCE 17.69%
USA 17.39%
UK 16.41%
EUROPE 16.28%
SWITZERLAND 15.58%
SING/MLYSIA 15.07%
DENMARK 14.72%
GERMANY 13.29%
AUSTRALIA 11.68%
ITALY 11.39%
CANADA 11.10%
JAPAN 9.59%
NORWAY 8.91%
AUSTRIA 7.09%
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
EDGAR REPRESENTATION OF CHART
CAPITAL APPRECIATION AND
REINVESTING DIVIDENDS--$474,094
CAPITAL APPRECIATION ONLY--$159,597
1969
1973
1977
1981
1985
1989
1993
1997
1999
Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential Mutual Fund. Common stock total
return is based on the Standard & Poor's 500 Composite Stock Price Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indexes.
------------------------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $20.7 TRILLION
CANADA--2.1%
U.S.--49.0%
EUROPE--32.5%
PACIFIC BASIN--16.4%
Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1,577 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.
EDGAR REPRESENTATION OF CHART
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1999)
1926
1936
1946
1956
1966
1996
1999
Year-End
- --------------------------------------------------------------------------------
Source: Ibbotson Associates. Used with permission. All
rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from
1926-1999. Yields represent that of an annually renewed
one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the
yields of any Prudential Mutual Fund.
II-4
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) Articles of Restatement, incorporated by reference to Exhibit 1 to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on February 28, 1995 (File No. 2-75128).
(2) Articles Supplementary, incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 22 to the Registration Statement on Form
N-1A filed via EDGAR on March 1, 1996 (File No. 2-75128).
(3) Articles Supplementary, incorporated by reference to Exhibit (a)(3)
to Post-Effective Amendment No. 25 to the Registration Statement on Form
N-1A filed via EDGAR on December 30, 1998 (File No. 2-75128).
(b) By-Laws.*
(c) (1) Specimen stock certificate, incorporated by reference to
Exhibit 4(a) to Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A filed via EDGAR on March 4, 1997 (File
No. 2-75128).
(2) Instruments Defining Rights of Shareholders, incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A filed via EDGAR on March 2, 1994
(File No. 2-75128).
(d) (1) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc., incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A filed via EDGAR on March 4, 1997 (File No. 2-75128).
(2) Amended and Restated Subadvisory Agreement between Prudential
Investments Fund Management LLC and The Prudential Investment
Corporation.*
(e) (1) Selected Dealer Agreement, incorporated by reference to
Exhibit (e)(1) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A filed via EDGAR on December 30, 1998 (File No.
2-75128).
(2) Distribution Agreement, incorporated by reference to Exhibit (e)(2)
to Post-Effective Amendment No. 25 to the Registration Statement on Form
N-1A filed via EDGAR on December 30, 1998 (File No. 2-75128).
(g) (1) Custodian Agreement between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed via
EDGAR on March 4, 1997 (File No. 2-75128).
(2) Amendment to Custodian Contract, incorporated by reference to
Exhibit (g)(2) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A filed via EDGAR on December 30, 1998 (File No.
2-75128).
(3) Amendment to Custodian Contract.*
(h) (1) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc, incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A filed via EDGAR on March 4, 1997 (File No.
2-75128).
(2) Amendment to Transfer Agency Agreement.*
(i) Opinion and Consent of Counsel.*
(j) Consent of independent accountants.*
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares, incorporated by reference to Exhibit (m)(1) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed via
EDGAR on December 30, 1998 (File No. 2-75128).
(2) Amended and Restated Distribution and Service Plan for Class B
shares, incorporated by reference to Exhibit (m)(2) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed via
EDGAR on December 30, 1998 (File No. 2-75128).
C-1
<PAGE>
(3) Amended and Restated Distribution and Service Plan for Class C
shares, incorporated by reference to Exhibit (m)(3) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed via
EDGAR on December 30, 1998 (File No. 2-75128).
(n) Amended and Restated Rule 18f-3 Plan, incorporated by reference to
Exhibit (o) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A filed via EDGAR on December 30, 1998 (File No.
2-75128).
- ------------------------
*Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit (b) to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any stockholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit (e)(2)
to the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised, that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1940 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
C-2
<PAGE>
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
See "How the Fund is Managed -- Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. The address of each person is Gateway
Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
David R. Odenath, Jr. Officer in Charge, President, Officer in Charge, President, Chief Executive
Chief Officer and Chief Operating Officer, PIFM; Senior
Executive Officer and Chief Vice President, The Prudential Insurance Company
Operating Officer of America (Prudential)
Robert F. Gunia Executive Vice President and Executive Vice President and Chief Administrative
Chief Administrative Officer Officer, PIFM; Vice President, Prudential;
President, Prudential Investment Management
Services LLC (PIMS)
William V. Healey Executive Vice President, Executive Vice President, Chief Legal Officer and
Chief Legal Officer and Secretary, PIFM; Vice President and Associate
Secretary General Counsel, Prudential; Senior Vice
President, Chief Legal Officer and Secretary, PIMS
Brian W. Henderson Executive Vice President Executive Vice President, PIFM; Senior Vice
President and Chief Operating Officer, PIMS
Stephen Pelletier Executive Vice President Executive Vice President, PIFM
Judy A. Rice Executive Vice President Executive Vice President, PIFM
Lynn M. Waldvogel Executive Vice President Executive Vice President, PIFM
</TABLE>
(b) THE PRUDENTIAL INVESTMENT CORPORATION (PIC)
See "How the Fund is Managed -- Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory and
Other Services" in the Statement of Additional Information constituting Part B
of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza, Newark,
New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Jeffrey Hiller Chief Compliance Officer Chief Compliance Officer, Prudential Global Asset
Management
John R. Strangfeld, Jr. Chairman of the Board, President of Prudential Global Asset Management
President, Chief Executive Group of Prudential; Senior Vice President,
Officer and Director Prudential; Chairman of the Board, President,
Chief Executive Officer and Director, PIC
Bernard Winograd Senior Vice President and Chief Executive Officer, Prudential Real Estate
Director Investors; Senior Vice President and Director, PIC
</TABLE>
C-3
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services (PIMS)
PIMS is distributor for Cash Accumulation Trust, COMMAND Government Fund,
COMMAND Money Fund, COMMAND Tax-Free Fund, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Diversified Bond Fund, Inc., Prudential Diversfied Funds, Prudential Emerging
Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Total Return Fund, Inc., Prudential Government Income Fund,
Inc., Prudential Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential High Yield Total Return Fund, Inc., Prudential Index Series Fund,
Prudential Institutional Liquidity Portfolio, Inc., Prudential International
Bond Fund, Inc., Prudential Mid-Cap Value Fund, Prudential MoneyMart Assets,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities
Fund, Prudential Sector Funds, Inc., Prudential Small-Cap Quantum Fund, Inc.,
Prudential Small Company Value Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential Tax-Managed Funds, Prudential 20/20 Focus Fund, Prudential
World Fund, Inc., The Prudential Investment Portfolios, Inc., Target Funds and
The Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts: Separate
Accounts: Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential Variable
Contract Account-11, The Prudential Variable Contract Account-24, The Prudential
Variable Contract GI-2, The Prudential Discovery Select Group Variable Contract
Account, The Pruco Life Flexible Premium Variable Annuity Account, The Pruco
Life of New Jersey Flexible Premium Variable Annuity Account, The Prudential
Individual Variable Contract Account and The Prudential Qualified Individual
Variable Contract Account.
(b) Information concerning officers and directors of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME (1) UNDERWRITER REGISTRANT
- -------- ------------- -------------
<S> <C> <C>
Margaret Deverell Vice President and Chief Financial Officer None
Robert F. Gunia President Vice President and Director
Kevin Frawley Senior Vice President and Compliance None
213 Washington Street Officer
Newark, NJ 07102
William V. Healey Senior Vice President, Secretary and Chief None
Legal Officer
Brian W. Henderson Senior Vice President and Officer None
John R. Strangfeld, Jr. Advisory Board Member President and Director
</TABLE>
- ------------------------
(1)The address of each person named is Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, The Prudential Investment Corporation, Prudential
Plaza, 751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and Prudential
Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents
required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11), 31a-1(f),
31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center Three, 100
Mulberry Street, Newark, NJ 07102-4077, and the remaining accounts, books and
other documents required by such other pertinent provisions of Section 31(a) and
the Rules promulgated thereunder will be kept by State Street Bank and Trust
Company and Prudential Mutual Fund Services LLC.
C-4
<PAGE>
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Fund is Managed --
Manager" and "How the Fund is Managed -- Investment Adviser" in the Prospectus
and the caption "Investment Advisory and Other Services" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act, the Fund certifies that it meets all of the requirements
for effectiveness of this Post-Effective Amendment to the Registration Statement
under Rule 485(b) under the Securities Act and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed by the
undersigned, duly authorized, in the City of Newark, and State of New Jersey, on
the 25th day of February, 2000.
PRUDENTIAL EQUITY FUND, INC.
/s/ John R. Strangfeld, Jr.
----------------------------------------------------------------------
(JOHN R. STRANGFELD, JR., PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Delayne D. Gold Director February 25, 2000
- ----------------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Director February 25, 2000
- ----------------------------------
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale Director February 25, 2000
- ----------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Thomas T. Mooney Director February 25, 2000
- ----------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Director February 25, 2000
- ----------------------------------
STEPHEN P. MUNN
/s/ David R. Odenath, Jr. Director February 25, 2000
- ----------------------------------
DAVID R. ODENATH, JR.
/s/ Richard A. Redeker Director February 25, 2000
- ----------------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Director February 25, 2000
- ----------------------------------
ROBIN B. SMITH
/s/ John R. Strangfeld, Jr. President and Director February 25, 2000
- ----------------------------------
JOHN R. STRANGFELD, JR.
/s/ Louis A. Weil, III Director February 25, 2000
- ----------------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Director February 25, 2000
- ----------------------------------
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer and Principal February 25, 2000
- ---------------------------------- Financial and
GRACE C. TORRES Accounting Officer
</TABLE>
<PAGE>
EXHIBIT INDEX
(a) (1) Articles of Restatement, incorporated by reference to Exhibit 1 to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on February 28, 1995 (File No. 2-75128).
(2) Articles Supplementary, incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 22 to the Registration Statement on Form
N-1A filed via EDGAR on March 1, 1996 (File No. 2-75128).
(3) Articles Supplementary, incorporated by reference to Exhibit (a)(3)
to Post-Effective Amendment No. 25 to the Registration Statement on Form
N-1A filed via EDGAR on December 30, 1998 (File No. 2-75128).
(b) By-Laws.*
(c) (1) Specimen stock certificate, incorporated by reference to
Exhibit 4(a) to Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A filed via EDGAR on March 4, 1997 (File
No. 2-75128).
(2) Instruments Defining Rights of Shareholders, incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A filed via EDGAR on March 2, 1994
(File No. 2-75128).
(d) (1) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc., incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A filed via EDGAR on March 4, 1997 (File No. 2-75128).
(2) Amended and Restated Subadvisory Agreement between Prudential
Investments Fund Management LLC and The Prudential Investment
Corporation.*
(e) (1) Selected Dealer Agreement, incorporated by reference to Exhibit
(e)(1) to Post-Effective Amendment No. 25 to the Registration Statement
on Form N-1A filed via EDGAR on December 30, 1998 (File No. 2-75128).
(2) Distribution Agreement, incorporated by reference to Exhibit (e)(2)
to Post-Effective Amendment No. 25 to the Registration Statement on Form
N-1A filed via EDGAR on December 30, 1998 (File No. 2-75128).
(g) (1) Custodian Agreement between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A filed via
EDGAR on March 4, 1997 (File No. 2-75128).
(2) Amendment to Custodian Contract, incorporated by reference to
Exhibit (g)(2) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A filed via EDGAR on December 30, 1998 (File
No. 2-75128).
(3) Amendment to Custodian Contract.*
(h) (1) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc, incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A filed via EDGAR on March 4, 1997 (File No.
2-75128).
(2) Amendment to Transfer Agency Agreement.*
(i) Opinion and Consent of Counsel.*
(j) Consent of independent accountants.*
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares, incorporated by reference to Exhibit (m)(1) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed via
EDGAR on December 30, 1998 (File No. 2-75128).
(2) Amended and Restated Distribution and Service Plan for Class B
shares, incorporated by reference to Exhibit (m)(2) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed via
EDGAR on December 30, 1998 (File No. 2-75128).
(3) Amended and Restated Distribution and Service Plan for Class C
shares, incorporated by reference to Exhibit (m)(3) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed via
EDGAR on December 30, 1998 (File No. 2-75128).
(n) Amended and Restated Rule 18f-3 Plan, incorporated by reference to
Exhibit (o) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A filed via EDGAR on December 30, 1998 (File
No. 2-75128).
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*Filed herewith.
<PAGE>
Prudential Equity Fund, Inc.
Amended and Restated By-Laws
ARTICLE I
STOCKHOLDERS
Section 1. PLACE OF MEETING. All meetings of the stockholders shall be held
at the principal office of the Corporation in the State of Maryland or at such
other place within the United States as may from time to time be designated by
the Board of Directors and stated in the notice of such meeting.
Section 2. ANNUAL MEETINGS. The annual meeting of the stockholders of the
Corporation shall be held in the month of April of each year on such date and at
such hour as may from time to time be designated by the Board of Directors and
stated in the notice of such meeting, for the purpose of electing directors for
the ensuing year and for the transaction of such other business as may properly
be brought before the meeting.
Section 3. SPECIAL OR EXTRAORDINARY MEETINGS. Special or extraordinary
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board, the President or a majority of the Board of Directors,
and shall be called by the Secretary upon receipt of the request in writing
signed by stockholders holding not less than 25% of the common stock issued and
outstanding and entitled to vote thereat. Such request shall state the purpose
or purposes of the proposed meeting. The Secretary shall inform such
stockholders of the reasonably estimated costs of preparing and mailing such
notice of meeting and
<PAGE>
upon payment to the Corporation of such costs, the Secretary shall give notice
stating the purpose or purposes of the meeting as required in this Article and
by-law to all stockholders entitled to notice of such meeting. No special
meeting need be called upon the request of the holders of shares entitled to
cast less than a majority of all votes entitled to be cast at such meeting to
consider any matter which is substantially the same as a matter voted upon at
any special meeting of stockholders held during the preceding twelve months.
Section 4. NOTICE OF MEETINGS OF STOCKHOLDERS. Not less than ten days' and
not more than ninety days' written or printed notice of every meeting of
stockholders, stating the time and place thereof (and the general nature of the
business proposed to be transacted at any special or extraordinary meeting),
shall be given to each stockholder entitled to vote thereat by leaving the same
with him or at his residence or usual place of business or by mailing it,
postage prepaid, and addressed to him at his address as it appears upon the
books of the Corporation. If mailed, notice shall be deemed to be given when
deposited in the United States mail addressed to the stockholder as aforesaid.
No notice of the time, place or purpose of any meeting of stockholders need
be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
Section 5. RECORD DATE. The Board of Directors may fix,
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in advance, a date not exceeding ninety days preceding the date of any meeting
of stockholders, any dividend payment date or any date for the allotment of
rights, as a record date for the determination of the stockholders entitled to
notice of and to vote at such meeting or entitled to receive such dividends or
rights, as the case may be; and only stockholders of record on such date shall
be entitled to notice of and to vote at such meeting or to receive such
dividends or rights, as the case may be. In the case of a meeting of
stockholders, such date shall not be less than ten days prior to the date fixed
for such meeting.
Section 6. QUORUM, ADJOURNMENT OF MEETINGS. The presence in person or by
proxy of the holders of record of a majority of the shares of the common stock
of the Corporation issued and outstanding and entitled to vote thereat shall
constitute a quorum at all meetings of the stockholders except as otherwise
provided in the Articles of Incorporation. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the holders of a
majority of the stock present in person or by proxy shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until the requisite amount of stock entitled to vote at such meeting
shall be present. At such adjourned meeting at which the requisite amount of
stock entitled to vote thereat shall be represented any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 7. VOTING AND INSPECTORS. At all meetings,
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<PAGE>
stockholders of record entitled to vote thereat shall have one vote for each
share of common stock standing in his/her name on the books of the
Corporation (and such stockholders of record holding fractional shares, if
any, shall have proportionate voting rights) on the date for the
determination of stockholders entitled to vote at such meeting, either in
person or by proxy. A stockholder may sign a writing authorizing another
person to act as proxy. Signing may be accomplished by the stockholder or the
stockholder's authorized agent signing the writing or causing the
stockholder's signature to be affixed to the writing by any reasonable means,
including facsimile signature. A stockholder may authorize another person to
act as proxy by transmitting, or authorizing the transmission of, a telegram,
cablegram, datagram, or other means of electronic transmission to the person
authorized to act as proxy or to a proxy solicitation firm, proxy support
service organization, or other person authorized by the person who will act as
proxy to receive the transmission.
All elections shall be had and all questions decided by a majority of the
vote cast at a duly constituted meeting, except as otherwise provided by statute
or by the Articles of Incorporation or by these By-Laws.
At any election of Directors, the Chairman of the meeting may, and upon the
request of the holders of ten per cent (10%) of the stock entitled to vote at
such election shall, appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of Director shall be appointed such
Inspector.
Section 8. CONDUCT OF STOCKHOLDERS' MEETINGS. The meetings of the
stockholders shall be presided over by the Chairman of the Board, or if he is
not present, by the President, or if he is not present, by a Vice-President, or
if none of them is present, by a Chairman to be elected at the meeting. The
Secretary of the
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Corporation, if present, shall act as a Secretary of such meetings, or he is not
present, an Assistant Secretary shall so act; if neither the Secretary nor the
Assistant Secretary is present, then the meeting shall elect its Secretary.
Section 9. CONCERNING VALIDITY OF PROXIES, BALLOTS, ETC. At every meeting
of the stockholders, all proxies shall be received and taken in charge of and
all ballots shall be received and canvassed by the Secretary of the meeting, who
shall decide all questions touching the qualification of voters, the validity of
the proxies and the acceptance or rejection of votes, unless inspectors of
election shall have been appointed by the Chairman of the meeting, in which
event such inspectors of election shall decide all such questions.
ARTICLE II
BOARD OF DIRECTORS
Section 1. NUMBER AND TENURE OF OFFICE. The business and affairs of the
Corporation shall be conducted and managed by a Board of Directors of not
less than three nor more than twelve Directors, as may be determined from
time to time by vote of a majority of the Directors then in office. Directors
need not be stockholders.
Section 2. VACANCIES. In case of any vacancy in the Board of Directors
through death, resignation or other cause, other than an increase in the number
of Directors, a majority of the remaining Directors, although a majority is less
than a quorum, by an affirmative vote, may elect a successor to hold office
until the
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<PAGE>
next annual meeting of stockholders or until his successor is chosen and
qualifies.
Section 3. INCREASE OR DECREASE IN NUMBER OF DIRECTORS. The Board of
Directors, by the vote of a majority of the entire Board, may increase the
number of Directors and may elect Directors to fill the vacancies created by any
such increase in the number of Directors until the next annual meeting or until
their successors are duly chosen and qualified. The Board of Directors, by the
vote of a majority of the entire Board, may likewise decrease the number of
Directors to a number not less than three.
Section 4. PLACE OF MEETING. The Directors may hold their meetings, have or
more offices, and keep the books of the Corporation, outside the State of
Maryland, at any office or offices of the Corporation or at any other place as
they may from time to time by resolution determine, or in the case of meetings,
as they may from time to time by resolution determine or as shall be specified
or fixed in the respective notices or waivers of notice thereof.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such time and on such notice as the Directors may from time to
time determine.
The annual meeting of the Board of Directors shall be held as soon as
practicable after the annual meeting of the stockholders for the election of
Directors.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be held from time to time upon call of the
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Chairman of the Board, the President, the Secretary or two or more of the
Directors, by oral or telegraphic or written notice duly served on or sent or
mailed to each Director not less than one day before such meeting. No notice
need be given to any Director who attends in person or to any Director who, in
writing executed and filed with the records of the meeting either before or
after the holding thereof, waives such notice. Such notice or waiver of notice
need not state the purpose or purposes of such meeting.
Section 7. QUORUM. One-third of the Directors then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two Directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall have been obtained.
The act of the majority of the Directors present at any meeting at which there
is a quorum shall be the act of the Directors, except as may be otherwise
specifically provided by statute or by the Articles of Incorporation or by these
By-Laws.
Section 8. OPERATING COMMITTEE. The Board of Directors may, by the
affirmative vote of a majority of the whole Board, appoint from the Directors
an Operating Committee to consist of such number of Directors (not less than
three) as the Board may from time to time determine. The Chairman of the
Committee shall be elected by the Board of Directors. The Board of Directors
by such affirmative vote shall have power at any time to change the members
of such Committee and may fill vacancies in the Committee
7
<PAGE>
by election from the Directors. When the Board of Directors is not in
session, to the extent permitted by law the Operating Committee shall have
and may exercise any or all of the powers of the Board of Directors in the
management of the business and affairs of the Corporation. Operating
Committee may fix its own rules of procedure, any may meet when and as
provided by such rules or by resolution of the Board of Directors, but in
every case the present of a majority shall be necessary to constitute a
quorum. During the absence of a member of the Operating Committee, the
remaining members may appoint a member of the Board of Directors to act in
his place.
Section 9. OTHER COMMITTEES. The Board of Directors, by the affirmative
vote of a majority of the whole Board, may appoint from the Directors other
committees which shall in each case consist of such number of Directors (not
less than one) and shall have and may exercise such powers as the Board may
determine in the resolution appointing them. A majority of all the members of
any such committee may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to change the members and powers of any
such committee, to fill vacancies and to discharge any such committee.
Section 10. TELEPHONE MEETINGS. Members of the Board of Directors or a
committee of the Board of Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the
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<PAGE>
meeting can hear each other at the same time. Participation in a meeting by
these means constitutes presence in person at the meeting.
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting, if a written consent to such action is signed by all
members of the Board or of such committee, as the case may be, and such written
consent is filed with the minutes of the proceedings of the Board or committee.
Section 12. COMPENSATION OF DIRECTORS. No Director shall receive any stated
salary or fees from the Corporation for his services as such if such Director
is, otherwise than by reason of being such Director, an interested person (as
such term is defined by the Investment Company Act of 1940) of the Corporation
or of its investment adviser, administrator or principal underwriter. Except as
provided in the preceding sentence, Directors shall be entitled to receive such
compensation from the Corporation for their services as may from time to time be
vote by the Board of Directors.
Section 13. NOMINATING COMMITTEE. The Board of Directors may by the
affirmative vote of a majority of the entire Board appoint from its members a
Nominating Committee composed of two or more directors who are not "interested
persons" (as defined in the Investment Company Act of 1940) of the Corporation,
as the Board may from time to time determine. The Nominating Committee shall be
9
<PAGE>
empowered to elect its own chairman who may call, or direct the Secretary of the
Corporation to call meetings in accordance with the notice provisions of these
By-Laws otherwise applicable to meetings of the Board of Directors. The
Nominating Committee shall recommend to the Board a slate of persons who are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Corporation, which may include members of the Nominating Committee, to be
nominated for election as directors by the stockholders at each annual meeting
of stockholders and to fill any vacancy occurring for any reason among the
directors who are not such interested persons.
ARTICLE III
OFFICERS
Section 1. EXECUTIVE OFFICERS. The executive officers of the Corporation
shall be chosen by the Board of Directors as soon as may be practicable after
the annual meeting of the stockholders. These may include a Chairman of the
Board of Directors (who shall be a Director) and shall include a President (who
shall be a Director), one or more Vice-Presidents (the number thereof to be
determined by the Board of Directors), a Secretary and a Treasurer. The Board of
Directors or the Operating Committee may also in its discretion appoint
Assistant Secretaries, Assistant Treasurers and other officers, agents and
employees, who shall have such authority and perform such duties as the Board or
the Operating Committee may determine. The Board of Directors may fill any
vacancy which may occur in any office. Any two offices, except those of
President
10
<PAGE>
and Vice-President, may be held by the same person, but no officer shall
execute, acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law or these By-Laws to be executed, acknowledged or
verified by two or more officers.
Section 2. TERM OF OFFICE. The term of office of all officers shall be one
year and until their respective successors are chose and qualified. Any officer
may be removed from office at any time with or without cause by the vote of a
majority of the whole Board of Directors.
Section 3. POWERS AND DUTIES. The officers of the Corporation shall have
such powers and duties as generally pertain to their respective offices, as well
as such powers and duties as may from time to time be conferred by the Board of
Directors or the Operating Committee.
ARTICLE IV
CAPITAL STOCK
Section 1. CERTIFICATES FOR SHARES. Each stockholder of the Corporation
shall be entitled to a certificate or certificates for the full shares of stock
of the Corporation owned by him in such form as the Board may from time to time
prescribe.
Section 2. TRANSFER OF SHARES. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney or legal representative, upon surrender and
cancellation of certificates, if any, for the same number of shares, duly
endorse or accompanied by
11
<PAGE>
proper instruments of assignment and transfer, with such proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require; in the case of shares not represented by certificates, the same or
similar requirements may be imposed by the Board of Directors.
Section 3. STOCK LEDGERS. The stock ledgers of the Corporation, containing
the names and addresses of the stockholders and the number of shares held by
them respectively, shall be kept at the principal offices of the Corporation or,
if the Corporation employs a Transfer Agent, at the offices of the Transfer
Agent of the Corporation.
Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors
or the Operating Committee may determine the conditions upon which a new
certificate of stock of the Corporation of any class may be issued in place of a
certificate which is alleged to have been lost, stolen or destroyed; and may, in
its discretion, require the owner of such certificate of his legal
representative to give bond, with sufficient surety, to the Corporation and each
Transfer Agent, if any, to indemnify it and each Transfer Agent against any and
all loss or claims which may arise by reason of the issue of a new certificate
in the place of the one so lost, stolen or destroyed.
ARTICLE V
CORPORATE SEAL
The Board of Directors may provide for a suitable corporate seal, in such
form and bearing such inscriptions at it may
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determine.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of January
and shall end on the 31st day of December in each year.
ARTICLE VII
INDEMNIFICATION
The Corporation shall indemnify directors, officers, employees and agents
of the Corporation against judgments, fines, settlements and expenses to the
fullest extent authorized, and in the manner permitted, by applicable federal
and state law.
ARTICLE VIII
CUSTODIAN
Section 1. The Corporation shall have as custodian or custodians one or
more trust companies or banks of good standing, each having a capital, surplus
and undivided profits aggregating not less than fifty million dollars
($50,000,000), and, to the extent required by the Investment Company Act of
1940, the funds and securities held by the Corporation shall be kept in the
custody of one or more such custodians, provided such custodian or custodians
can be found ready and willing to act, and further provided that the Corporation
may use as subcustodians, for the purpose of holding any foreign securities and
related funds of the Corporation such foreign banks as the Board of Directors
may approve and as shall be permitted by law.
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<PAGE>
Section 2. The Corporation shall upon the resignation or inability to serve
of its custodian or upon change of the custodian:
(i) in case of such resignation or inability to serve, use its best
efforts to obtain a successor custodian;
(ii) require that the cash and securities owned by the Corporation be
delivered directly to the successor custodian; and
(iii) in the event that no successor custodian can be found, submit to
the stockholders before permitting delivery of the cash and securities
owned by the Corporation otherwise than to a successor custodian, the
question whether or not this Corporation shall be liquidated or shall
function without a custodian.
ARTICLE X
AMENDMENT OF BY-LAWS
The By-Laws of the Corporation may be altered, amended, added to or
repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-Laws
by action of the Board of Directors may be altered or repealed by stockholders.
As amended as of November 19, 1999
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PRUDENTIAL EQUITY FUND, INC.
SUBADVISORY AGREEMENT
Agreement made as of this 2nd day of May, 1988, and amended and restated
as of January 1, 2000, between Prudential Investments Fund Management LLC, a
New York limited liability company and successor to Prudential Mutual Fund
Management Inc., a Delaware Corporation ("PMF" or the "Manager"), and The
Prudential Investment Corporation, a New Jersey Corporation (the
"Subadviser").
WHEREAS, the Manager has entered into a Management Agreement, dated May
2, 1988 (the "Management Agreement"), with Prudential Equity Fund, Inc.,
formerly known as Prudential-Bache Equity Fund, Inc. (the "Fund"), a Maryland
corporation and a diversified open-end management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"),
pursuant to which PMF will act as Manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Fund, the Subadviser shall manage the investment
operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance
with the Fund's investment objectives, policies and restrictions as stated
in the Prospectus, (such Prospectus and Statement of Additional Information
as currently in effect and as amended or supplemented from time to time,
being herein called the "Prospectus"), and subject to the following
understandings:
(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the Fund,
and what portion of the assets will be invested or held uninvested as
cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus of the Fund and with the
instructions and directions of the Manager and of the Board of
Directors of the Fund and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986 and
all other applicable federal and state laws and regulations.
(iii) The Subadviser shall determine the securities and futures
contracts to be purchased or sold by the Fund and will place orders
with or through such persons, brokers, dealers or
<PAGE>
futures commission merchants (including but not limited to
Prudential Securities Incorporated) to carry out the policy with
respect to brokerage as set forth in the Fund's Registration Statement
and Prospectus or as the Board of Directors may direct from time to
time. In providing the Fund with investment supervision, it is
recognized that the Subadviser will give primary consideration to
securing the most favorable price and efficient execution. Within
the framework of this policy, the Subadviser may consider the
financial responsibility, research and investment information and
other services provided by brokers, dealers or futures commission
merchants who may effect or be a party to any such transaction or
other transactions to which the Subadviser's other clients may be a
party. It is understood that Prudential Securities Incorporated may
be used as principal broker for securities transactions but that no
formula has been adopted for allocation of the Fund's investment
transaction business. It is also understood that it is desirable for
the Fund that the Subadviser have access to supplemental investment
and market research and security and economic analysis provided by
brokers or futures commission merchants who may execute brokerage
transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, the
Subadviser is authorized to place orders for the purchase and sale
of securities and futures contracts for the Fund with such brokers
or futures commission merchants, subject to review by the Fund's Board
of Directors from time to time with respect to the extent and
continuation of this practice. It is understood that the services
provided by such brokers or futures commission merchants may
be useful to the Subadviser in connection with the Subadviser's
services to other clients.
On occasions when the Subadviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Fund as
well as other clients of the Subadviser, the Subadviser, to the extent
permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities or futures contracts to be
sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be
made by the Subadviser in the manner the Subadviser considers to be
the most equitable and consistent with its fiduciary obligations to
the Fund and to such other clients.
(iv) The Subadviser shall maintain all books and records with
respect to the Fund's portfolio transactions required by subparagraphs
(b)(5), (6), (7), (9), (10) and (11) and
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<PAGE>
paragraph (f) of Rule 31a-1 under the 1940 Act and shall render to the
Fund's Board of Directors such periodic and special reports as the
Board may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on each
business day with information relating to all transactions concerning
the Fund's assets and shall provide the Manager with such information
upon request of the Manager.
(vi) The investment management services provided by the
Subadviser hereunder are not to be deemed exclusive, and the
Subadviser shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of
the Fund to serve in the capacities in which they are elected.
Services to be furnished by the Subadviser under this Agreement may be
furnished through the medium of any of such directors, officers or
employees.
(c) the Subadviser shall keep the Fund's books and records required to
be maintained by the Subadviser pursuant to paragraph 1(a) hereof and
shall timely furnish to the Manager all information relating to the
Subadviser's services hereunder needed by the Manager to keep the
other books and records of the Fund required by Rule 31a-1 under the
1940 Act. The Subadviser agrees that all records which it maintains
for the Fund are the property of the Fund and the Subadviser will
surrender promptly to the Fund any of such records upon the Fund's
request, provided however that the Subadviser may retain a copy of
such records. The Subadviser further agrees to preserve for the
periods prescribed by Rule 31a-2 of the Commission under the 1940 Act
any such records as are required to be maintained by it pursuant to
paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services
to be provided to the Fund pursuant to the Management Agreement and
shall oversee and review the Subadviser's performance of its duties
under this Agreement.
3. The Manager shall pay the Subadviser at the annual rate of .250
of 1% of the Fund's average daily net assets up to $500 million,
.226 of 1% of average daily net assets between $500 million and
$1 billion and .203 of 1% of average daily net assets in excess of
$1 billion for furnishing the services described in paragraph 1
hereof.
4. The Subadviser shall not be liable for any error of judgment or for
any loss suffered by the Fund or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the Subadviser's
part in the performance of its duties or from its reckless disregard
of its obligations and duties under this Agreement.
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<PAGE>
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the
requirements of the 1940 Act; provided, however, that this Agreement
may be terminated by the Fund at any time, without the payment of any
penalty, by the Board of Directors of the Fund or by vote of a
majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund, or by the Manager or the Subadviser at any time,
without the payment of any penalty, on not more than 60 days' nor less
than 30 days' written notice to the other party. This Agreement shall
terminate automatically in the event of its assignment (as defined in
the 1940 Act) or upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Subadviser's directors, officers, or employees who may also be
a director, officer or employee of the Fund to engage in any other
business or to devote his or her time and attention in part to the
management or other aspects of any business, whether of a similar or a
dissimilar nature, nor limit or restrict the Subadviser's right to
engage in any other business or to render services of any kind to any
other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish
the Subadviser at its principal office all prospectuses, proxy
statements, reports to stockholders, sales literature or other
material prepared for distribution to stockholders of the Fund or the
public, which refer to the Subadviser in any way, prior to use thereof
and not to use material if the Subadviser reasonably objects in
writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to
the Subadviser hereunder by first-class or overnight mail, facsimile
transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Fund must be obtained in conformity with the requirements of the
1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By /s/ Robert F. Gunia
-------------------------------------
Executive Vice President
THE PRUDENTIAL INVESTMENT CORPORATION
By /s/ John R. Strangfeld, Jr.
-------------------------------------
President
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<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT
This Amendment to the respective Custodian Contract/Agreement is made
as of February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.
WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and
WHEREAS, each Fund and the Custodian desire to amend certain provisions
of the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, each Fund and the Custodian desire to amend and restate
certain other provisions of the Contract relating to the custody of assets of
each of the Funds held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereby agree to
amend the Contract, to add the following new provisions which supersede the
provisions in the existing contracts relating to the custody of assets of the
Funds outside the United States.
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
1
<PAGE>
"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule
17f-5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list
on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the assets of the Funds which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the
2
<PAGE>
Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign
3
<PAGE>
Custody Manager which is a foreign securities depository or clearing agency that
is not a Mandatory Securities Depository). The Foreign Custody Manager shall
provide the Board at least annually with information as to the factors used in
such monitoring system. If the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has selected are no
longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder and withdraw the Foreign Assets from such
Eligible Foreign Custodian as soon as reasonably practicable.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO.
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17f-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty (60)
days after receipt by the non-terminating party of such notice.
4
<PAGE>
The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Funds with
respect to designated countries.
3.10. MOST FAVORED CLIENT.
If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUNDS HELD
OUTSIDE THE UNITED STATES.
4.1 DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, PROVIDED HOWEVER,
that (i) the records of the Custodian with respect to foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign
Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
5
<PAGE>
4.4.1. DELIVERY OF FOREIGN ASSETS.
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Fund in
accordance with customary market practice in the country where
such foreign securities are held or traded, including, without
limitation: (A) delivery against expectation of receiving
later payment; or (B) in the case of a sale effected through a
Foreign Securities System, in accordance with the rules
governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or otherwise become
payable;
(v) to the issuer thereof, or its agent, for transfer into the
name of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such
Foreign Sub-Custodian) or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with reasonable
market custom; PROVIDED that in any such case the Foreign
Sub-Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from
the Foreign Sub-Custodian's own negligence or willful
misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
6
<PAGE>
(ix) for delivery as security in connection with any borrowing by
the Funds requiring a pledge of assets by the Funds;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the foreign securities to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper
trust\corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
4.4.2. PAYMENT OF FUND MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where
such foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer)
against expectation of receiving later delivery of such
foreign securities; or (B) in the case of a purchase effected
through a Foreign Securities System, in accordance with the
rules governing the operation of such Foreign Securities
System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees
under this Contract, legal fees, accounting fees, and other
operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign
exchange contracts for the Fund, including transactions
executed with or through the Custodian or its Foreign
Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as
7
<PAGE>
original margin and variation margin;
(vi) for payment of part or all of the dividends received in
respect of securities sold short;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper trust\corporate purpose,
and naming the person or persons to whom such payment is to be
made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.
The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:
(i) legal opinions relating to whether local law restricts with
respect to U.S. registered mutual funds (a) access of a fund's
independent public accountants to books and records of a
Foreign Sub-Custodian or Foreign Securities System, (b) a
fund's ability to recover in the event of bankruptcy or
insolvency of a Foreign Sub-Custodian or Foreign Securities
System, (c) a fund's ability to recover in the event of a loss
by a Foreign Sub-Custodian or Foreign Securities System, and
(d)
8
<PAGE>
the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;
(ii) summary of information regarding Foreign Securities Systems;
and
(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership
limits, and (f) unique market arrangements.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities, except to the extent that the Fund incurs
loss or damage due to failure of such nominee to meet its standard of care set
forth in the Contract. The Custodian or a Foreign Sub-Custodian shall not be
obligated to accept securities on behalf of a Fund under the terms of this
Contract unless the form of such securities and the manner in which they are
delivered are in accordance with reasonable market practice.
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use
9
<PAGE>
reasonable commercial efforts to facilitate the exercise of voting and other
shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.
4.11. TAX LAW.
Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of
10
<PAGE>
the Fund by the tax law of the United States or of any state or political
subdivision thereof. It shall be the responsibility of each Fund to notify the
Custodian of the obligations imposed on the Fund or the Custodian as custodian
of the Fund by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
4.12. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in
the event of any conflict between the provisions of Articles 3 and 4
hereof, the provisions of Article 3 shall prevail.
11
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
/s/Marc L. Parsons By: /s/Ronald E. Logue
- ------------------ ------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
<PAGE>
Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.
WITNESSED BY:
By: /s/S. Jane Rose By: /s/Grace Torres
--------------- ---------------
Grace Torres
Treasurer
First Financial Fund, Inc.
The High Yield Plus Fund, Inc.
WITNESSED BY:
By: /s/Stephanie L. Bourque By: /s/Arthur J. Brown
----------------------- ------------------
Arthur J. Brown
Secretary
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. Deposito Central de
Valores S.A.
People's The Hongkong and Shanghai --
Republic Banking Corporation Limited,
of China Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
</TABLE>
14
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Costa Rica Banco BCT S.A. --
Croatia Privredna Banka Zagreb d.d --
Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring
Transactions in
Securities in Book-Entry
Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
Iceland Icebank Ltd.
</TABLE>
15
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
India Deutsche Bank AG --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.
Japan The Daiwa Bank, Limited Japan Securities
Depository Center
The Fuji Bank, Limited
Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic The Hongkong and Shanghai Banking
of Korea Corporation Limited
Latvia JSC Hansabank-Latvija --
Lebanon British Bank of the Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
</TABLE>
16
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
The
Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
Portugal Banco Comercial Portugues --
</TABLE>
17
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Romania ING Bank N.V. --
Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Republic Ceskoslovenska Obchodni Banka, A.S. --
Slovenia Bank Austria d.d. Ljubljana --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad
& Tobago Republic Bank Limited --
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
Ottoman Bank
</TABLE>
18
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust Company, --
London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities)
</TABLE>
* The global custody network approved by each fund is set forth below on
Schedules A-1 and A-2.
19
<PAGE>
SCHEDULE A-1
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
Country Funds
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina Mexico Global Utility Fund, Inc.
Australia Morocco Prudential 20/20 Focus Fund
Austria Netherlands Prudential Balanced Fund
Bangladesh/+/ New Zealand Prudential Equity Fund, Inc.
Belgium Norway Prudential Equity Income Fund
Brazil Pakistan Prudential Developing Markets Fund
Canada Peru Prudential Diversified Bond Fund, Inc.
Chile Philippines Prudential Distressed Securities Fund, Inc.
China Poland Prudential Diversified Funds
Columbia Portugal Prudential Emerging Growth Fund, Inc.
Cyprus Russia Prudential Global Genesis Fund, Inc.
Czech Republic Singapore Prudential Global Limited Maturity Fund, Inc.
Denmark Slovak Republic Prudential Index Series Fund
Ecuador South Africa Prudential Intermediate Global Income Fund, Inc.
Egypt Spain Prudential International Bond Fund, Inc.
Finland Sri Lanka Prudential Mid-Cap Value Fund
France Sweden Prudential Natural Resources Fund, Inc.
Germany Switzerland Prudential Pacific Growth Fund, Inc.
Ghana Taiwan Prudential Real Estate Securities Fund
Greece Thailand Prudential Small-Cap Quantum Fund, Inc.
Hong Kong Turkey Prudential Small Company Value Fund, Inc.
Hungary Transnational Prudential Tax-Managed Equity Fund
India United Kingdom Prudential Utility Fund, Inc.
Indonesia Uruguay Prudential World Fund, Inc.
Ireland Venezuela The Prudential Investment Portfolios Fund, Inc.
Israel The Target Portfolio Trust
Italy The Global Total Return Fund, Inc.
Ivory Coast
Japan
Jordan
Kenya
Korea
Lebanon
Malaysia
- ---------------------------------------------------------------------------------------------------------------
+ Countries marked by a dagger have been approved only for The Target Portfolio Trust.
</TABLE>
<PAGE>
SCHEDULE A-2
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
Country Funds
- ----------------------------------------------------------------------------------------------
<S> <C>
United Kingdom Cash Accumulation Trust
Command Government Fund
Command Money Fund
Prudential Government Income Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential High Yield Income Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC
Central de Custodia e de Liquidacao
Financeira de Titulos
Canada The Canadian Depository
for Securities Limited
People's Republic Shanghai Securities Central Clearing
of China and Registration Corporation
Shenzhen Securities Central Clearing
Co., Ltd.
Croatia
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen
(the Danish Securities Center)
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Egypt Misr Company for Clearing, Settlement,
and Central Depository
Finland The Finnish Central Securities
Depository
France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
(Apothetirion Titlon AE)
Hong Kong The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]
India The National Securities Depository Limited
Indonesia Bank Indonesia
Ireland Central Bank of Ireland
Securities Settlement Office
Israel The Tel Aviv Stock Exchange Clearing
House Ltd.
Bank of Israel
Italy Monte Titoli S.p.A.
Banca d'Italia
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System
Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)
Morocco Maroclear
The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand New Zealand Central Securities
Depository Limited
Norway Verdipapirsentralen (the Norwegian
Registry of Securities)
Pakistan Central Depository Company of Pakistan
Limited
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
Romania National Securities Clearing, Settlement and
Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Pte)
Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
South Africa The Central Depository Limited
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
Sri Lanka Central Depository System
(Pvt) Limited
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.
Thailand Thailand Securities Depository
Company Limited
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
Venezuela Central Bank of Venezuela
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE C
MARKET INFORMATION
<TABLE>
<CAPTION>
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
<S> <C>
(Frequency)
THE GUIDE TO CUSTODY IN WORLD MARKETS An overview of safekeeping and
(annually) settlement practices and
procedures in each market in which
State Street Bank and Trust Company
offers custodial services.
GLOBAL CUSTODY NETWORK REVIEW Information relating to the operating
(annually) history and structure of
depositories and subcustodians
located in the markets in which
State Street Bank and Trust Company
offers custodial services,
including transnational
depositories.
GLOBAL LEGAL SURVEY With respect to each market in
(annually) which State Street Bank and Trust
Company offers custodial services,
opinions relating to whether local
law restricts (i) access of a
fund's independent public
accountants to books and records of
a Foreign Sub-Custodian or Foreign
Securities System, (ii) the Fund's
ability to recover in the event of
bankruptcy or insolvency of a
Foreign Sub-Custodian or Foreign
Securities System, (iii) the Fund's
ability to recover in the event of
a loss by a Foreign Sub-Custodian
or Foreign Securities System, and
(iv) the ability of a foreign
investor to convert cash and cash
equivalents to U.S. dollars.
SUBCUSTODIAN AGREEMENTS Copies of the subcustodian
(annually) contracts State Street Bank and
Trust Company has entered into with
each subcustodian in the markets in
which State Street Bank and Trust
Company offers subcustody services
to its US mutual fund clients.
Network Bulletins (weekly): Developments of interest to
investors in the markets in which
State Street Bank and Trust Company
offers custodial services.
Foreign Custody Advisories With respect to markets in which
(as necessary): State Street Bank and Trust Company
offers custodial services which
exhibit special custody risks,
developments which may impact State
Street's ability to deliver
expected levels of service.
</TABLE>
<PAGE>
SCHEDULE D
LIST OF FUNDS, CONTRACTS AND AGREEMENTS
<TABLE>
<CAPTION>
Fund Name Execution Date
- --------- --------------
<S> <C>
Cash Accumulation Trust December 12, 1997
Command Government Fund July 1, 1990
Command Money Fund July 1, 1990
Command Tax-Free Fund July 1, 1990
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)
Prudential 20/20 Focus Fund April 14, 1998
Prudential California Municipal Fund August 1, 1990
Prudential Developing Markets Fund June 1, 1998
Prudential Distressed Securities Fund, Inc. February 8, 1996
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Diversified Funds September 2, 1998
Prudential Emerging Growth Fund, Inc. October 21, 1996
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Limited Maturity Fund, Inc. October 25, 1990
(formerly Prudential Short-Term Global
Income Fund, Inc.)
Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)
Prudential Government Securities Trust July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
Prudential High Yield Total Return Fund, Inc. May 30, 1997
Prudential International Bond Fund, Inc. January 16, 1996
(formerly The Global Government Plus Fund, Inc.)
The Prudential Investment Portfolios Fund, Inc.
(formerly Prudential Jennison Series Fund, Inc.) October 27, 1995
Prudential Mid-Cap Value Fund April 14, 1998
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Prudential MoneyMart Assets, Inc. July 25, 1990
Prudential Mortgage Income Fund, Inc. August 1, 1990
(formerly Prudential GNMA Fund, Inc.)
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990
Prudential National Municipals Fund, Inc. July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Real Estate Securities Fund February 18, 1998
Prudential Small Cap Quantum Fund, Inc. August 1, 1997
Prudential Small Company Value Fund, Inc. July 26, 1990
(formerly Prudential Growth Opportunity Fund, Inc.)
Prudential Special Money Market Fund, Inc. January 12, 1990
Prudential Structured Maturity Fund, Inc. July 25, 1989
Prudential Tax-Free Money Fund, Inc. July 26, 1990
Prudential Utility Fund, Inc. June 6, 1990
Prudential World Fund, Inc. June 7, 1990
(formerly Prudential Global Fund, Inc.)
The Target Portfolio Trust November 9, 1992
Global Utility Fund, Inc. December 21, 1989
Nicholas-Applegate Fund, Inc. April 10, 1987
Prudential Balanced Fund September 4, 1987
Prudential Equity Income Fund January 6, 1987
Prudential Global Genesis Fund, Inc. October 21, 1987
Prudential Institutional Liquidity Portfolio, Inc. November 20, 1987
Prudential Intermediate Global Income Fund, Inc. May 19, 1988
Prudential Municipal Bond Fund August 25, 1987
Prudential Natural Resources Fund, Inc. September 18, 1987
Prudential Tax-Managed Equity Fund December 8, 1998
The Asia Pacific Fund April 24, 1987
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Duff & Phelps Utilities Tax-Free Income Fund, Inc. November 21, 1991
First Financial Fund, Inc. May 1, 1986
The High Yield Income Fund, Inc. November 6, 1987
The High Yield Plus Fund, Inc. March 15, 1988
</TABLE>
<PAGE>
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
Prudential Equity Fund, Inc. (the "Fund") and Prudential Mutual Fund
Services LLC (successor to Prudential Mutual Fund Services, Inc.)("PMFS")
is entered into as of August 24, 1999.
WHEREAS, the Fund and PMFS have entered into a Transfer Agency
and Service Agreement (the "Agreement") pursuant to which PMFS serves as
transfer agent, dividend disbursing agent and shareholder servicing agent
for the Fund; and
WHEREAS, the Fund and PMFS desire to amend the Agreement to
confirm the Fund's agreement to pay transfer agency account fees and
expenses for beneficial owners holding shares through omnibus accounts
maintained by The Prudential Insurance Company of America, its
subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation
of the Agreement, and other good and valuable consideration, Article 8 of
the Agreement is amended by adding the following section to the Agreement:
8.04 PMFS may enter into agreements with Prudential
or any subsidiary or affiliate of Prudential whereby PMFS will
maintain an omnibus account and the Fund will reimburse PMFS for
amounts paid by PMFS to Prudential, or such subsidiary or
affiliate, in an amount not in excess of the annual maintenance
fee for each beneficial shareholder account and transactional
fees and expenses with respect to such beneficial shareholder
account as if each beneficial shareholder account were maintained
by PMFS on the Fund's records, subject to the fee schedule
attached hereto as Schedule A. Prudential, its subsidiary or
affiliate, as the case may be, shall maintain records relating to
each beneficial shareholder account that underlies the omnibus
account maintained by PMFS.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed in their names and on their behalf by and through
their duly authorized officers, as of the day and year first above written.
PRUDENTIAL EQUITY FUND, INC. ATTEST:
By: /s/ Robert F. Gunia By: /s/ Marguerite E.H. Morrison
---------------------------- ----------------------------
Robert F. Gunia Marguerite E.H. Morrison
Vice President Secretary
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTEST:
By: /s/ Brian W. Henderson By: /s/ William V. Healey
---------------------------- ----------------------------
Brian W. Henderson William V. Healey
President Secretary
<PAGE>
[LOGO] PIPER
MARBURY
RUDNICK
& WOLFE LLP
Exhibit 99 (i)
6225 Smith Avenue
Baltimore, Maryland 21209-3600
www.piperrudnick.com
PHONE (410) 580-3000
FAX (410) 580-3001
February 28, 2000
Prudential Equity Fund, Inc.
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Re: REGISTRATION STATEMENT ON FORM N-1A
Ladies and Gentlemen:
We have acted as special Maryland counsel to Prudential Equity Fund,
Inc., (the "Fund"), in connection with the registration under the Securities
Act of 1933, as amended, by the Fund of up to 1,000,000,000 shares of Common
Stock, par value $.01 per share, dividend equally into four classes,
designated as Class A, Class B, Class C and Class Z (the "Shares"), pursuant
to a registration statement filed with the Securities and Exchange Commission
(the "Commission") on Form N-1A, as amended (the "Registration Statement").
In this capacity, we have examined the Fund's charter and by-laws, the
proceedings of the Board of Directors of the Fund authorizing the issuance of
the Shares in accordance with the Registration Statement, a good standing
certificate by the Maryland State Department of Assessments and Taxation
issued as of a recent date, a Certificate of the Secretary of the Fund (the
"Certificate"), and such other statutes, certificates, instruments and
documents relating to the Fund and matters of law as we have deemed necessary
to the issuance of this opinion. In such examination, we have assumed,
without independent investigation, the genuineness of all signatures, the
conformity of final documents in all material respects to the versions
thereof submitted to us in draft form, the authenticity of all documents
submitted to us as originals, the conformity with originals of all documents
submitted to us as copies (and the authenticity of the originals of such
copies), and the accuracy and completeness of all public records reviewed by
us. As to factual matters, we have relied on the Certificate and have not
independently verified the matters stated therein.
<PAGE>
[LOGO] PIPER
MARBURY Prudential Equity Fund, Inc.
RUDNICK February 28, 2000
& WOLFE LLP Page 2
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Fund has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The Shares to be issued by the Fund pursuant to the Registration
Statement have been duly authorized and, when issued as contemplated in the
Registration Statement in an amount not to exceed the number of Shares
authorized by the charter but unissued, will be validly issued, fully paid
and nonassessable.
In addition to the qualifications set forth above, this opinion is
subject to the qualification that we express no opinion as to the laws of any
jurisdiction other than the State of Maryland. We assume no obligation to
supplement this opinion if any applicable laws change after the date hereof
or if any facts or circumstances come to our attention after the date hereof
that might change this opinion. This opinion is limited to the matters set
forth herein, and no other opinion should be inferred beyond the matters
expressly stated.
We hereby consent to the filing of this opinion with the Commission as
Exhibit (i) to the Registration Statement. In giving our consent, we do not
thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations
of the Commission thereunder.
Very truly yours,
/s/ PIPER MARBURY RUDNICK & WOLFE LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated February 11, 2000, relating to the financial statements and
financial highlights of Prudential Equity Fund, Inc., which appears in such
Registration Statement. We also consent to the references to us under the
headings "Investment Advisory and Other Services" and "Financial Highlights" in
such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
February 29, 2000
