Rule 497(c)
File No. 2-82764
PRUDENTIAL STRATEGIST FUND, INC.
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PROSPECTUS DATED AUGUST 1, 1994
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Prudential Strategist Fund, Inc. (the Fund), formerly Prudential Growth Fund,
Inc., is an open-end, diversified management investment company. Its investment
objective is to seek a high total return (capital appreciation plus dividend and
interest income) consistent with reasonable risk. In seeking to achieve this
objective, the Fund allocates assets among equity securities, fixed-income
securities and cash based on an evaluation of current market and economic
conditions by Greg A. Smith Asset Management Corporation, its Subadviser. Under
normal market conditions, the Fund invests at least 50% of its total assets in
equity securities that, in the view of the Subadviser, have the potential for
long-term growth of capital. The Fund invests in common stocks, securities
convertible into common stocks, non-convertible preferred stocks and debt
securities of U.S. and non-U.S. issuers. The Fund may also purchase and sell
options on debt and equity securities, on financial indices and foreign
currencies, and financial futures and options thereon. THE FUND MAY ENGAGE IN
SHORT- SELLING AND SHORT-TERM TRADING. THESE TECHNIQUES MAY BE CONSIDERED
SPECULATIVE AND MAY RESULT IN HIGHER RISKS AND COSTS TO THE FUND. There can be
no assurance that the Fund's investment objective will be achieved. See "How the
Fund Invests--Investment Objective and Policies." The Fund's address is One
Seaport Plaza, New York, New York 10292, and its telephone number is (800)
225-1852.
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This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated August 1, 1994, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FUND HIGHLIGHTS
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The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
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WHAT IS PRUDENTIAL STRATEGIST FUND, INC.?
Prudential Strategist Fund, Inc. is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sales in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high total return (capital
appreciation plus dividend and interest income) consistent with reasonable risk.
It seeks to achieve this objective by allocating its assets among equity
securities, fixed income securities and cash based on an evaluation of current
market and economic conditions by the Subadviser. There can be no assurance that
the Fund's objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 7.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Fund may engage in
short-selling and short-term trading. The Fund may also purchase and sell
options on debt and equity securities, on financial indices and foreign
currencies, and financial futures and options thereon. These various hedging and
income enhancement strategies, including the use of derivatives, may be
considered speculative and may result in higher risks and costs to the Fund. See
"How the Fund Invests--Hedging and Income Enhancement Strategies--Risks of
Hedging and Income Enhancement Strategies" at page 10.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate based on the
Fund's average daily net assets. As of June 30, 1994, PMF served as manager or
administrator to 66 investment companies, including 37 mutual funds, with
aggregate assets of approximately $47 billion. Greg A. Smith Asset Management
Corporation (the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 12.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .25 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is paid an annual
distribution and service fee at the rate of 1% of the average daily net assets
of each of the Class B and Class C shares.
See "How the Fund is Managed--Distributor" at page 12.
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2
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WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
Class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How to
Buy Shares of the Fund" at page 17 and "Shareholder Guide--Shareholder Services"
at page 26.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values its Shares"
at page 14 and "Shareholder Guide--How to Buy Shares of the Fund" at page 17.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
*Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
*Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B
shares will automatically convert to Class A shares (which
are subject to lower ongoing distribution-related expenses)
approximately seven years after purchase.
*Class C Shares: Sold without an initial sales charge and, for one year after
purchase, are subject to a 1% CDSC on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 18.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 21.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any,
semi-annually and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that they be
paid to you in cash. See "Taxes, Dividends and Distributions" at page 15.
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3
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FUND EXPENSES
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<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ..... 5% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends ......... None None None
Deferred Sales Load (as a percentage
of original purchase price or
redemption proceeds, whichever
is lower) ............................... None 5% during the first year, 1% on
decreasing by 1% annually redemptions made
to 1% in the fifth and sixth within one year
years and 0% the seventh of purchase
year*
Redemption Fees ........................... None None None
Exchange Fee .............................. None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS) CLASS A SHARES CLASS B SHARES* CLASS C SHARES**
-------------- -------------- --------------
Management Fees ........................... .625% .625% .625%
12b-1 Fees ................................ .250%++ 1.000% 1.000%
Other Expenses ............................ .505% .505% .505%
----- ----- -----
Total Fund Operating Expenses ............. 1.380% 2.130% 2.130%
===== ===== =====
</TABLE>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following
expenses on a $1,000
investment, assuming (1) 5%
annual return and (2)
redemption at the end of each
time period
Class A .................... $ 63 $ 92 $122 $207
Class B .................... $ 72 $ 97 $124 $218
Class C** .................. $ 32 $ 67 $114 $246
You would pay the following
expenses on the same
investment, assuming no
redemption
Class A .................... $ 63 $ 92 $122 $207
Class B .................... $ 22 $ 67 $114 $218
Class C** .................. $ 22 $ 67 $114 $246
The above example with respect to Class A and Class B shares is based on
restated data for the Fund's fiscal year ended February 28, 1994. The above
example with respect to Class C shares is based on expenses expected to have
been incurred if Class C shares had been in existence during the fiscal year
ended February 28, 1994. The example should not be considered a representation
of past or future expenses. Actual expenses may be greater or less than those
shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Fund, such as directors' and professional fees, registration fees, reports
to shareholders, transfer agency and custodian fees and franchise taxes.
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* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended February 28,
1994.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
the Fund rather than on a per shareholder basis. Therefore, long-term
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares, the Distributor has agreed to limit
its distribution fees with respect to Class A shares of the Fund to no more
than .25 of 1% of the average daily net assets of the Class A shares for
the fiscal year ending February 28, 1995. Total operating expenses without
such limitation would be 1.43%. See "How the Fund is Managed--Distributor."
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4
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
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The following financial highlights have been audited by Price Waterhouse,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. No Class C shares were outstanding during
the periods indicated.
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<TABLE>
<CAPTION>
CLASS A
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JANUARY 22,
1990*
YEAR ENDED FEBRUARY 28/29, THROUGH
-------------------------------------------- FEBRUARY 28,
1994 1993 1992+ 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............... $15.74 $15.84 $14.91 $14.47 $14.45
------ ------ ------ ------ ------
Income from Investment Operations
Net investment income .............................. .03 .19 .21 .27 .01
Net realized and unrealized gain on
investment transactions .......................... 1.29 .37 1.75 .64 .01
------ ------ ------ ------ ------
Total from investment operations ................... 1.32 .56 1.96 .91 .02
------ ------ ------ ------ ------
Less Distributions
Dividends from net investment income ............... -- (.18) (.29) (.26) --
Distributions from net realized gains .............. (1.95) (.48) (.74) (.21) --
------ ------ ------ ------ ------
Total distributions ........................... (1.95) (.66) (1.03) (.47) --
------ ------ ------ ------ ------
Net asset value, end of period ..................... $15.11 $15.74 $15.84 $14.91 $14.47
====== ====== ====== ====== ======
TOTAL RETURN++: .................................... 8.81% 3.74% 13.76% 6.74% .14%
RATIOS/SUPLEMENTAL DATA:
Net assets, end of period (000) .................... $5,469 $4,264 $5,202 $1,105 $ 147
Ratios to average net assets:
Expenses, including distribution fees ............ 1.34% 1.29% 1.35% 1.46% 1.49%**
Expenses, excluding distribution fees ............ 1.13% 1.09% 1.15% 1.26% 1.29%**
Net investment income ............................ .20% 1.13% 1.37% 1.94% 3.39%**
Portfolio turnover rate ............................ 178% 99% 146% 77% 76%
<FN>
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* Commencement of offering of Class A shares.
** Annualized.
+ Calculated based upon weighted average shares outstanding during the year.
++ 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.
</FN>
</TABLE>
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5
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
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The following financial highlights, with respect to the five-year period
ended February 28, 1994, have been audited by Price Waterhouse, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. No Class C shares were outstanding during
the periods indicated.
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<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------------
YEARS ENDED FEBRUARY 28/29
----------------------------------------------------------------------------------------------
1994 1993 1992+ 1991 1990* 1989 1988 1987 1986 1985
---- ---- ----- ---- ----- ---- ---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ................... $15.74 $15.86 $14.92 $14.46 $13.40 $12.79 $14.38 $11.86 $ 9.12 $ 8.49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment income
(loss) ...................... (.09) .06 .11 .17 .26 .35 .24 .16 .26 .44
Net realized and unrealized
gain (loss) on investment
transactions ................ 1.29 .37 1.73 .65 1.21 .64 (.80) 3.04 2.73 .59
------ ------ ------ ------ ------ ------ ------ ------ ------ ----
Total from investment
operations .................. 1.20 .43 1.84 .82 1.47 .99 (.56) 3.20 2.99 1.03
------ ------ ------ ------ ------ ------ ------ ------ ------ ----
Less Distributions
Dividends from net investment
income ...................... -- (.07) (.16) (.16) (.41) (.38) (.15) (.18) (.25) (.40)
Distributions from net
realized gains .............. (1.95) (.48) (.74) (.20) -- -- (.88) (.50) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ----
Total distributions ........... (1.95) (.55) (.90) (.36) (.41) (.38) (1.03) (.68) (.25) (.40)
------ ------ ------ ------ ------ ------ ------ ------ ------ ----
Net asset value, end
of period ................... $14.99 $15.74 $15.86 $14.92 $14.46 $13.40 $12.79 $14.38 $11.86 $ 9.12
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN++: ............... 8.02% 2.91% 12.80% 6.03% 10.90% 7.90% -4.02% 27.93% 33.80% 12.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets,
end of period (000) ......... $203,115 $236,590 $275,826 $277,282 $327,406 $350,387 $446,155 $272,515 $157,329 $163,502
Ratios to average net assets+++:
Expenses, including
distribution fees ......... 2.13% 2.09% 2.15% 2.26% 1.70% 1.63% 1.81% 1.94% 1.85% 1.93%
Expenses, excluding
distribution fees ......... 1.13% 1.09% 1.15% 1.26% 0.97% 0.91% 0.88% 0.97% 0.97% 0.93%
Net investment income ....... (.59%) 0.37% 0.74% 1.14% 1.71% 2.67% 1.79% 1.24% 2.74% 5.23%
Portfolio turnover rate ....... 178% 99% 146% 77% 76% 64% 93% 109% 216% 233%
<FN>
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* On January 22, 1990, Prudential Mutual Fund Management, Inc. succeeded
Prudential Securities Incorporated as the manager of the Fund.
+ Calculated based upon weighted average shares outstanding during the year.
++ 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.
+++ The Fund adopted a plan of distribution effective July 1, 1985 which was
amended and restated on January 22, 1990. Consequently, historical expenses
and ratios of expenses to average net assets for Class B shares, prior to
1990, are not necessarily indicative of future expenses and related ratios
for that Class. See "How the Fund is Managed--Distributor."
</FN>
</TABLE>
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6
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HOW THE FUND INVESTS
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On July 19, 1994, at a special meeting of shareholders, shareholders
approved a change in the name of the Fund to Prudential Strategist Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK A HIGH TOTAL RETURN (CAPITAL
APPRECIATION PLUS DIVIDEND AND INTEREST INCOME) CONSISTENT WITH REASONABLE RISK.
IN SEEKING TO ACHIEVE THIS OBJECTIVE, THE FUND WILL ALLOCATE ASSETS AMONG EQUITY
SECURITIES, FIXED-INCOME SECURITIES AND CASH BASED ON AN EVALUATION OF CURRENT
MARKET AND ECONOMIC CONDITIONS BY GREG A. SMITH ASSET MANAGEMENT CORPORATION
(THE SUBADVISER).
Under normal market conditions, the Fund will invest at least 50% of its
total assets in equity securities that, in the view of the Subadviser, have the
potential for long-term growth of capital. The Fund invests in common stocks,
securities convertible into common stocks, non-convertible preferred stocks and
debt securities of U.S. and non-U.S. issuers. The Fund's investments in bonds
will be in securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, foreign government securities or in obligations of banks
or corporations rated A (upper medium grade obligations) or better by Standard &
Poor's Ratings Group (S&P) or Moody's Investors Service (Moody's). The Fund may
also purchase and sell options on debt and equity securities, on financial
indices and foreign currencies, and financial futures and options thereon. See
"Hedging and Income Enhancement Strategies" below. The Fund may engage in
short-selling and short-term trading, which may be considered speculative and
may result in higher risks and costs to the Fund. See "Other Investments and
Policies" below. THERE IS NO ASSURANCE THAT THE FUND WILL MEET ITS OBJECTIVE.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT FUNDAMENTAL
MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
In structuring the Fund's portfolio and in selecting specific investments
for the Fund, the Subadviser determines: (1) the mix of assets among equity
securities, fixed-income securities and cash; (2) the distribution of securities
among various economic sectors (such as energy, financial services and
utilities); (3) specific industries within each economic sector; and (4)
specific securities within each industry. In making asset allocations, the
Subadviser will consider the general economic environment, its impact on
financial markets, the rate of inflation, the outlook for real economic growth
in the United States and abroad and monetary, fiscal and foreign policy. Within
the framework of historical benchmarks and valuations, the Subadviser will
consider price/earnings ratios, ratios of market value to book value and
dividend growth. In selecting securities, the Subadviser considers economic
sectors and industries worldwide that in its judgment are most likely to benefit
from prevailing economic and market conditions.
When the Subadviser believes that in light of market and economic
conditions a defensive investment strategy is appropriate, the Fund will attempt
to reduce its exposure to market risk and may invest without limit in U.S.
Government securities, foreign government securities, corporate debt obligations
and high quality money market instruments.
MONEY MARKET INSTRUMENTS. The Fund may invest in high quality money market
instruments, including commercial paper of a U.S. or non-U.S. company, foreign
government securities, certificates of deposit, bankers' acceptances and time
deposits of domestic and foreign banks, and obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities. These obligations will
be U.S. dollar denominated or denominated in a foreign currency.
FOREIGN INVESTMENTS. Investing in securities of foreign companies and
countries involves certain considerations and risks which are not typically
associated with investing in U.S. Government securities and those of domestic
companies. Foreign companies are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those applicable
to U.S. companies. There may also be less government supervision and
7
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regulation of foreign securities exchanges, brokers and listed 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 or the U.S. Government. 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 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 on foreign securities exchanges are generally higher
than in the United States.
PORTFOLIO TURNOVER. The Fund does not expect to trade in securities for
short-term gain. It is anticipated that the annual portfolio turnover rate will
not exceed 100%. The portfolio turnover rate is calculated by dividing the
lesser of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a maturity
at the date of purchase of one year or less.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING DERIVATIVES,
TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE INCOME.
These strategies include the purchase and writing (i.e., sale) of put and call
options on stocks, stock indices, debt securities and foreign currencies, the
use of forward currency exchange contracts and the purchase and sale of stock
index futures and related options. The Fund's ability to use these strategies
may be limited by market conditions, regulatory limits and tax considerations
and there can be no assurance that any of these strategies will succeed. See
"Investment Objective and Policies" in the Statement of Additional Information.
New financial products and risk management techniques have been or may be
developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies and investment
restrictions.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON NATIONAL SECURITIES EXCHANGES OR IN
THE OVER-THE-COUNTER MARKET TO ENHANCE INCOME OR TO HEDGE THE FUND'S PORTFOLIO.
These options will be primarily on stocks and stock indices but may also be on
debt securities, U.S. Government securities (listed and over-the-counter, i.e.,
purchased or sold through primary U.S. Government securities dealers) and
foreign currencies. The Fund may write covered put and call options to generate
additional income through the receipt of premiums, purchase put options in an
effort to protect the value of a security that it owns against a decline in
market value and purchase call options in an effort to protect against an
increase in the price of securities (or currencies) it intends to purchase. The
Fund may also purchase put and call options to offset previously written put and
call options of the same series. See "Investment Objective and Policies--Options
on Securities" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY
SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE "EXERCISE PRICE" OR "STRIKE
PRICE"). The writer of a call option, in return for the premium, has the
obligation, upon exercise of the option, to deliver, depending upon the terms of
the option contract, the underlying securities or a specified amount of cash to
the purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period that
the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put
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option, in return for the premium, has the obligation, upon exercise of the
option, to acquire the securities or currency underlying the option at the
exercise price. The Fund might, therefore, as the writer of a put option be
obligated to purchase the underlying securities or currency for more than their
current market price.
OPTIONS ON STOCK INDICES ARE SIMILAR TO OPTIONS ON EQUITY SECURITIES 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, in return for a
premium paid, 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. The writer of an index option, in return for the premium, is
obligated to pay the amount of cash due upon exercise of the option. See
"Investment Objective and Policies--Options on Stock Indices" in the Statement
of Additional Information.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so
long as the Fund is obligated under the option, it owns an offsetting position
in the underlying security or currency or maintains cash, U.S. Government
securities or other liquid high-grade debt obligations with a value sufficient
at all times to cover its obligations. See "Investment Objective and
Policies--Options on Securities" in the Statement of Additional Information.
There is no limitation on the amount of call options the Fund may write. The
Fund may only write covered put options to the extent that cover for such
options does not exceed 25% of the Fund's net assets. The Fund will not purchase
an option if, as a result of such purchase, more than 20% of its total assets
would be invested in premiums for options and options on futures.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF THE FOREIGN SECURITIES IN ITS PORTFOLIO AGAINST FUTURE
CHANGES IN THE LEVEL OF CURRENCY EXCHANGE RATES. The Fund may conduct such
transactions on a spot, i.e., cash, basis at the rate then prevailing in the
currency exchange market or on a forward basis, by entering into a forward
contract to purchase or sell currency. A forward contract on foreign currency is
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days agreed upon by the parties from the date of the
contract at a price set on the date of the contract.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. These futures contracts
and related options will primarily be stock index futures and related options
but may also include futures contracts on debt securities, U.S. Government
securities and foreign currencies and related options. A stock index futures
contract is an agreement in which one party agrees to deliver to another an
amount of cash equal to a specific dollar amount times the difference between 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.
THE FUND MAY NOT PURCHASE OR SELL FUTURES CONTRACTS AND RELATED OPTIONS IF
IMMEDIATELY THEREAFTER THE SUM OF THE AMOUNT OF INITIAL MARGIN DEPOSITS ON THE
FUND'S EXISTING FUTURES AND OPTIONS ON FUTURES AND PREMIUMS PAID FOR SUCH
RELATED OPTIONS WOULD EXCEED 5% OF THE MARKET VALUE OF THE FUND'S TOTAL ASSETS.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE SUBADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than a specified futures contract
resulting in losses to the Fund.
THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON MAY
ALSO BE LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. SEE "INVESTMENT OBJECTIVE AND POLICIES--FUTURES CONTRACTS," "--OPTIONS
ON FUTURES
9
<PAGE>
CONTRACTS" AND "--CURRENCY FUTURES AND OPTIONS THEREON" AND "DIVIDENDS,
DISTRIBUTIONS AND TAXES" IN THE STATEMENT OF ADDITIONAL INFORMATION.
RISKS OF HEDGING AND INCOME 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. If the Subadviser's
prediction of movements in the direction of the securities, foreign currency and
interest rate markets is 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 options, foreign currency and futures contracts and
options on futures contracts include (1) dependence on the Subadviser'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 possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; (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 securities in connection with hedging
transactions; and (7) in the case of over-the-counter options, the risk of
default by the counterparty. See "Additional Risks of Options on Securities and
Currencies, Futures Contracts, Options on Futures Contracts and Forward
Contracts," "Special Risk Considerations Relating to Futures Contracts and
Options Thereon" and "Limitations on the Purchase and Sale of Futures Contracts
and Options on Futures Contracts" under the caption "Investment Objective and
Policies" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Fund may on occasion 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 period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money is
invested in the security. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and as 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. See "Investment Objective and Policies--Repurchase Agreements" in the
Statement of Additional Information.
SECURITIES LENDING
The Fund is permitted to lend its portfolio securities, although it has no
present intention of doing so. See "Investment Objective and Policies--Lending
of Portfolio Securities" in the Statement of Additional Information.
SHORT SELLING
The Fund may sell a security it does not own in anticipation of a decline
in the market value of that security (short sale). To complete such a
transaction, the Fund must borrow the security to make delivery to the buyer.
The Fund then is obligated to replace the security borrowed by purchasing it at
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay to the lender any dividends,
interest or other distributions which accrue during the period of the loan. To
borrow the security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out. Until the Fund replaces a borrowed
security, the Fund will maintain daily a segregated account, containing cash or
U.S. Government securities, at such a level that the amount deposited in the
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<PAGE>
account plus the amount deposited with the broker as collateral will equal or
exceed the greater of (i) the current value of the security sold short and (ii)
the market value of the security at the time it was sold short. The Fund will
incur a loss as a result of the short sale if the price of the security
increases between the date of the short sale and the date on which the Fund
replaces the borrowed security. The Fund will realize a gain if the security
declines in price between those dates in an amount greater than any premium paid
in connection with the short sale. This result is the opposite of what would
result from a cash purchase of a long position in a security. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
any premium, dividends or interest the Fund may be required to pay in connection
with a short sale. No more than 25% of the Fund's net assets, when added
together, will be: (i) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (ii) allocated to segregated
accounts in connection with short sales.
The Fund also may make short sales "against-the-box," in which the Fund
enters into a short sale of a security which the Fund owns or has the right to
obtain at no added cost. Not more than 25% of the Fund's net assets (determined
at the time of the short sale against-the-box) may be subject to such sales.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (computed at the time the loan is made) from banks 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.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of its total assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Securities that have legal or contractual restrictions on resale but have a
readily available market, such as Rule 144A securities and privately placed
commercial paper, are not considered illiquid for purposes of this limitation.
The Subadviser will monitor the liquidity of such restricted securities under
the supervision of the Board of Directors. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period. See "Investment
Objective and Policies--Illiquid Securities" in the Statement of Additional
Information.
The staff of the Securities and Exchange Commission (SEC) has taken the
position that purchased over-the-counter options and the assets used as "cover"
for written over-the-counter options are illiquid securities. However, the Fund
may treat the securities it uses as cover for written over-the-counter options
on U.S. Government securities as liquid provided it follows a specified
procedure. The Fund may sell over-the-counter options on U.S. Government
securities only to qualified dealers who agree that the Fund may repurchase any
over-the-counter options it writes for a maximum price to be calculated by a
predetermined formula. In such cases, the over-the-counter option would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option.
The staff of the SEC has also taken the position that purchased
over-the-counter options and the assets used as "cover" for written
over-the-counter options are illiquid securities unless the Fund and the
counterparty have provided for the Fund, at the Fund's election, to unwind the
over-the-counter option. The exercise of such an option ordinarily would involve
the payment by the Fund of an amount 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."
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
11
<PAGE>
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HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Fund's Manager conducts and
supervises the daily business operations of the Fund. The Fund's Subadviser
furnishes daily investment advisory services.
For the fiscal year ended February 28, 1994, the total expenses as a
percentage of average net assets for the Fund's Class A and Class B shares were
1.34% and 2.13%, respectively. See "Financial Highlights." No Class C shares
were outstanding during the fiscal year ended February 28, 1994.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .625 OF 1% OF THE FIRST $500 MILLION OF
AVERAGE DAILY NET ASSETS, .55 OF 1% OF THE NEXT $500 MILLION AND .50 OF 1%
THEREAFTER OF THE FUND'S AVERAGE DAILY NET ASSETS. It was incorporated in May
1987 under the laws of the State of Delaware. For the fiscal year ended February
28, 1994, the Fund paid management fees to PMF of .625% of the Fund's average
net assets. See "Manager" in the Statement of Additional Information.
As of June 30, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies. These companies have
aggregate assets of approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. SEE
"MANAGER" IN THE STATEMENT OF ADDITIONAL INFORMATION.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND GREG A. SMITH ASSET
MANAGEMENT CORPORATION, THE SUBADVISER FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND. PMF CONTINUES TO HAVE RESPONSIBILITY
FOR ALL INVESTMENT ADVISORY SERVICES PURSUANT TO THE MANAGEMENT AGREEMENT AND
SUPERVISES THE SUBADVISER'S PERFORMANCE OF SUCH SERVICES. Under the Subadvisory
Agreement, PMF compensates the Subadviser for its services thereunder at an
annual rate of .375 of 1% of the Fund's average daily net assets up to $500
million, .35 of 1% of such amounts between $500 million and $1 billion and .30
of 1% of such amounts in excess of $1 billion.
Greg A. Smith, the president and principal stockholder of the Subadviser,
is the portfolio manager of the Fund and has responsibility for the day-to-day
management of the Fund's portfolio. Mr. Smith has managed the Fund's portfolio
since August 1, 1991 and from its inception in 1983 until September 1987. Greg
A. Smith is also a consultant to Prudential Securities Incorporated (Prudential
Securities or PSI) and has acted as Prudential Securities' Chief Investment
Strategist since 1982. He also acts as a consultant to The Prudential Investment
Corporation on two open-end funds managed by the Manager. Prudential Securities
provides office facilities to the Subadviser.
Mr. Smith is recognized in the financial community as a leading asset
allocation strategist. Since 1983, he has been named by Institutional Investor
magazine as a member of its All-America Research Team. He is also responsible
for Prudential Securities receiving the top ranking for asset allocation among
twelve brokerage firms for the five-year period ended March 31, 1994 in a
continuing survey conducted by The Wall Street Journal and Wilshire Associates.
As a consultant to PSI, the Subadviser currently prepares PSI's Market and
Economic Outlook.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE
OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C SHARES OF
THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
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<PAGE>
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND
CLASS C SHARES. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Fund may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and serivce
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.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PMFD 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 ASSET VALUE OF THE CLASS A SHARES. The Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class A
shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. It is expected that in the case of Class A shares,
proceeds from the distribution fee will be used primarily to pay account
servicing fees to financial advisers. PMFD has 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
February 28, 1995.
For the fiscal year ended February 28, 1994, PMFD received payments of
$8,690 under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended February 28, 1994. PMFD also received
approximately $44,200 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE
CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of 1%
of the average daily net assets of the Class B and Class C shares and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class B
and Class C shares. The service fee is used to pay for personal service and/or
the maintenance of shareholder accounts. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales Charges."
For the fiscal year ended February 28, 1994, Prudential Securities incurred
distribution expenses of approximately $1,037,200 under the Class B Plan and
received $2,180,398 from the Fund under the Class B Plan. In addition,
Prudential Securities received approximately $249,900 in contingent deferred
sales charges from redemptions of Class B shares during the year. No Class C
shares were outstanding during the fiscal year ended February 28, 1994.
For the fiscal year ended February 28, 1994, the Fund paid distribution
expenses of .21% and 1.00% of the average net assets of the Class A and Class B
shares, respectively. The Fund records all payments made under the Plans as
expenses in the calculation of net investment income. No Class C shares were
outstanding during the fiscal year ended February 28, 1994. Prior to the date of
this Prospectus, the Class A and Class B Plans operated as "reimbursement type"
plans and, in the case of Class B, provided for the reimbursement of
distribution expenses incurred in current and prior years. See "Distributor" in
the Statement of Additional Information.
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<PAGE>
Distribution expenses attributable to the sale of shares of the Fund will
be allocated to each class based upon the ratio of sales of each class to the
sales of all 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.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission
merchant for the Fund, provided that the commissions, fees or other remuneration
it receives are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Masssachusetts 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. Its mailing address is P.O.
Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------
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
BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE
FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the net asset
value. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
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<PAGE>
Although the legal rights of each class of shares will be 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. It is expected, however, that the
NAV of the three classes will tend to converge immediately after the recording
of dividends which will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
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HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire period.
"Average annual" total return smooths out variations in performance and takes
into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in the Fund over a
one-month or 30- day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund may
also from time to time advertise its 30-day yield. The Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals, rating services and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Fund in any advertisement or
information including performance data of the Fund. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
TAXATION OF THE FUND
THE FUND HAS QUALIFIED AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE FUND WILL
NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes" in the
Statement of Additional Information.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs may subject the Fund to federal income taxes on certain income and gains
realized by the Fund.
TAXATION OF SHAREHOLDERS
All dividends distributed out of net investment income, together with
distributions of net short-term capital gains, will be taxable as ordinary
income to the shareholder whether or not reinvested. Any net long-term capital
gains (i.e., the
15
<PAGE>
excess of net long-term capital gains over net short-term capital losses)
distributed to shareholders will be taxable as such to the shareholders, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum long-term capital gains rate for individuals is
currently 28%. The maximum long-term capital gains rate for corporate
shareholders is currently the same as the maximum tax rate for ordinary income.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A shares constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
WITHHOLDING TAXES
Under U.S. Treasury regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. Notwithstanding the
foregoing, dividends of net investment income and short-term capital gains to a
foreign shareholder will generally be subject to U.S. withholding tax at the
rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY,
SEMI-ANNUALLY AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL GAINS.
IN DETERMINING AMOUNTS OF CAPITAL GAINS TO BE DISTRIBUTED, ANY CAPITAL LOSS
CARRYFORWARDS FROM PRIOR YEARS WILL BE OFFSET AGAINST CAPITAL GAINS. Dividends
paid by the Fund with respect to each class of shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day and will be in the same amount except that each class will bear its
own distribution-related expenses, generally resulting in lower dividends for
Class B and Class C shares. Distributions of net capital gains, if any, will be
paid in the same amount for each class of shares. See "How the Fund Values its
Shares."
Dividends paid by the Fund are eligible for the 70% dividends-received
deduction for corporate shareholders to the extent that the Fund's income is
derived from certain dividends received from domestic corporations. Capital
gains distributions are not eligible for the 70% dividends-received deduction.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Account Maintenance, P.O. Box 15015, New Brunswick, New
Jersey 08906-5015. If you hold shares through Prudential Securities, you should
contact your financial adviser to elect to redeem dividends and distributions in
cash. The Fund will notify each shareholder after the close of the Fund's
taxable year both of the dollar amount and the taxable status of that year's
dividends and distributions on a per share basis. See "Dividends, Distributions
and Taxes" in the Statement of Additional Information.
WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE, THE PRICE YOU PAY WILL INCLUDE THE
DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO
YOU AS A TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE
TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON MARCH 21, 1983. THE FUND IS
AUTHORIZED TO ISSUE 500 MILLION SHARES
16
<PAGE>
OF COMMON STOCK, $.01 PAR VALUE PER SHARE, DIVIDED INTO THREE CLASSES,
DESIGNATED CLASS A, CLASS B AND CLASS C COMMON STOCK, WHICH CONSISTS OF
166,666,666 AUTHORIZED CLASS A SHARES, 166,666,666 AUTHORIZED CLASS B SHARES AND
166,666,668 AUTHORIZED CLASS C SHARES. Each class of common stock represents an
interest in the same assets of the Fund and is identical in all respects except
that (i) each class bears different distribution expenses, (ii) each class has
exclusive voting rights with respect to its distribution and service plan
(except that the Fund has agreed with the SEC in connection with the offering of
a conversion feature on Class B shares to submit any amendment of the Class A
Plan to both Class A and Class B shareholders), (iii) each class has a different
exchange privilege and (iv) only Class B shares have a conversion feature. See
"How the Fund is Managed--Distributor." The Fund has received an order from the
SEC permitting the issuance and sale of multiple classes of common stock.
Currently, the Fund is offering three classes, designated Class A, Class B and
Class C shares. Pursuant to the Fund's Articles of Incorporation, the Board of
Directors may authorize the creation of additional series of common stock and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. 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 as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class 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 common
stock 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. The Fund's shares do not have cumulative voting
rights for the election of Directors.
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 A 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.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the Securities
and Exchange Commission (the SEC) under the Securities Act of 1933, as amended
(the Securities Act). Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
You may purchase shares of the Fund through Prudential Securities, Prusec
or directly from the Fund through its Transfer Agent, Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent), Attention: Investment Services,
P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment requirement is $50. See "Shareholder Services" below.
17
<PAGE>
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER
BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT
YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES)
OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). See "Alternative
Purchase Plan" below. See also "How the Fund Values its Shares."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first 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, 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 Strategist Fund, Inc., specifying on the wire
the account number assigned by PMFS and the investor's name and identifying the
sales charge alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 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 Strategist Fund,
Inc., Class A, Class B or Class C 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.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES), WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------- ------------------------ -------------------------------------------------
<S> <C> <C>
CLASS A Maximum initial sales charge of 5% .30 OF 1% (Currently Initial sales charge waived or reduced
of the public offering price being charged at a rate for certain purchases
of .25 OF 1%)
CLASS B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another class
the amount invested or the
redemption proceeds on redemptions
made within one year of purchase
</TABLE>
18
<PAGE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Common Stock"), and
(iii) only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following 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 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or 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 and Class C 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 Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES. SEE "REDUCTION AND WAIVER OF INITIAL SALES CHARGES" BELOW.
19
<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
<TABLE>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- --------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined
in the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or members. In the case of Benefit Plans whose accounts
are held directly with the Transfer Agent or Prudential Securities and for which
the Transfer Agent or Prudential Securities does individual account record
keeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI or its
subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares may be
purchased at NAV by participants who are repaying loans made from such plans to
the participant.
Prudential Retirement Accumulation Program 401(k) Plan. Class A shares may
be purchased at net asset value, with a waiver of the initial sales charge, by
or on behalf of participants in the Prudential Retirement Accumulation Program
401(k) Plan for which the Transfer Agent or Prudential Securities provides
recordkeeping services (PruRap Plan) provided that (i) for existing plans, the
plan has existing assets of $1 million or more, as measured on the last business
day of the month, invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) held
at the Transfer Agent or Prudential Securities and (ii) for new plans, the plan
initially invests $1 million or more in shares of non-money market Prudential
Mutual Funds or has at least 1,000 eligible employees or members.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or the
PruRap Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Miscellaneous Waivers. In addition, Class A shares may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(a) Directors and officers of the Fund and other Prudential Mutual Funds, (b)
employees of Prudential Securities and PMF and their subsidiaries and members of
the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of
20
<PAGE>
its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities,
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end, non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) on which no deferred sales
load, fee or other charge was imposed on redemption and (iii) the financial
adviser served as the client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
HOW TO SELL YOUR 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 BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING 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, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT 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, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906- 5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when
21
<PAGE>
trading on such Exchange is restricted, (c) 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 (d) during any other period when the SEC by
order, so permits; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions described in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECKS.
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 SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." 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 net asset value
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 then $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 contingent deferred sales charge
will be imposed on any involuntary redemption.
30-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 Fund at the NAV next
determined after the order is received, which must be within 30 days after the
date of the redemption. No sales charge will apply to such repurchases. You will
receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify the
Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege generally is exercised that you are
entitled to credit for the contingent deferred sales charge previously paid.
Exercise of the repurchase privilege will generally not affect federal income
tax treatment of any gain realized upon redemption. If the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, will
generally not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
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 one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares 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 one year, in the case of Class C shares. A CDSC will
be applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
purchased through reinvestment of dividends or distributions are not subject to
a CDSC. The amount of any contingent deferred sales charge will be paid to and
retained by the Distributor. See "How the Fund Is Managed--Distributor" and
"Waiver of the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to
22
<PAGE>
have been made on the last day of the month. The CDSC will be calculated from
the first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------ -------------------
First ............................... 5.0%
Second .............................. 4.0%
Third ............................... 3.0%
Fourth .............................. 2.0%
Fifth ............................... 1.0%
Sixth ............................... 1.0%
Seventh ............................. None
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 the net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding six
years (5 years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value 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 to 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 THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), 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. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59-1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary
23
<PAGE>
Prototype Benefit Plans, the CDSC will be waived on redemptions which represent
borrowings from such plans. Shares purchased with amounts used to repay a loan
from such plans on which a CDSC was not previously deducted will thereafter be
subject to a CDSC without regard to the time such amounts were previously
invested. In the case of a 401(k) plan, the CDSC will also be waived upon the
redemption of shares purchased with amounts used to repay loans made from the
account to the participant and from which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by the
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. 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 (i.e., $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
for Class B shares, the per share net asset value 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. See "How the Fund Values its Shares."
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,
24
<PAGE>
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares. The conversion feature described above will not be implemented and,
consequently, the first conversion of Class B shares will not occur before
February, 1995, but as soon thereafter as practicable. At that time all amounts
representing Class B shares then outstanding beyond the applicable conversion
period will automatically convert to Class A shares together with all shares or
amounts representing Class B shares acquired through the automatic reinvestment
of dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service that (i) the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) 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.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES OF THE FUND MAY BE EXCHANGED FOR CLASS A, CLASS B AND
CLASS C SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV.
No sales charge will be imposed at the time of the exchange. Any applicable CDSC
payable upon the redemption of shares exchanged will be calculated from the
first day of the month after the initial purchase excluding the time shares were
held in a money market fund. Class B and Class C shares may not be exchanged
into money market funds other than Prudential Special Money Market Fund. For
purposes of calculating the holding period applicable to the Class B conversion
feature, the time period during which Class B shares were held in a money market
fund will be excluded. See "Conversion Feature--Class B Shares" above. An
exchange will be treated as a redemption and purchase for tax purposes. See
"Shareholder Investment Account--Exchange Privilege" in the Statement of
Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the 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. The Exchange Privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
25
<PAGE>
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., 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, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan-Class A Shares-Reduction and
Waiver of Initial Sales Charges" above. 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 on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60
days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
*AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
*AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
*TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code,
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
*SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
26
<PAGE>
*REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, NY 10292. In addition, monthly unaudited financial data are
available upon request from the Fund.
*SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417- 7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
27
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAXABLE BOND FUNDS
- --------------------------------------------------------------------------------
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
- --------------------------------------------------------------------------------
TAX-EXEMPT BOND FUNDS
- --------------------------------------------------------------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
- --------------------------------------------------------------------------------
GLOBAL FUNDS
- --------------------------------------------------------------------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
- --------------------------------------------------------------------------------
EQUITY FUNDS
- --------------------------------------------------------------------------------
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible(R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
* Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
* Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
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
- --------------------------------------------------------------------------------
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of an offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
FUND HIGHLIGHTS.............................. 2
Risk Factors and Special Characteristics .. 2
FUND EXPENSES................................ 4
FINANCIAL HIGHLIGHTS......................... 5
HOW THE FUND INVESTS......................... 7
Investment Objective and Policies.......... 7
Hedging and Income Enhancement Strategies.. 8
Other Investments and Policies............. 10
Investment Restrictions.................... 11
HOW THE FUND IS MANAGED...................... 12
Manager.................................... 12
Distributor................................ 12
Portfolio Transactions..................... 14
Custodian and Transfer and
Dividend Disbursing Agent................ 14
HOW THE FUND VALUES ITS SHARES............... 14
HOW THE FUND CALCULATES PERFORMANCE.......... 15
TAXES, DIVIDENDS AND DISTRIBUTIONS........... 15
GENERAL INFORMATION.......................... 16
Description of Common Stock................ 16
Additional Information..................... 17
SHAREHOLDER GUIDE............................ 17
How to Buy Shares of the Fund.............. 17
Alternative Purchase Plan.................. 18
How to Sell Your Shares.................... 21
Conversion Feature--Class B Shares......... 24
How to Exchange Your Shares................ 25
Shareholder Services....................... 26
THE PRUDENTIAL MUTUAL FUND FAMILY............A-1
- ------------------------------------------------
MF114A 433089X
- ------------------------------------------------
Class A: 743943 10 5
CUSIP Nos.: Class B: 743943 20 4
Class C: 743943 30 3
- ------------------------------------------------
Prudential
Strategist
Fund, Inc.
Prudential Mutual Funds (LOGO)
Building Your Future
On Our Strength(SM)
PROSPECTUS
August 1, 1994
<PAGE>
Rule 497(c)
File No. 2-82764
PRUDENTIAL STRATEGIST FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1994
Prudential Strategist Fund, Inc., formerly Prudential Growth Fund, Inc.
(the Fund), is an open-end diversified management investment company. Its
investment objective is to seek a high total return (capital appreciation plus
dividend and interest income) consistent with reasonable risk. In seeking to
achieve this objective, the Fund allocates assets among equity securities,
fixed-income securities and cash based on an evaluation of current market and
economic conditions by Greg A. Smith Asset Management Corporation, its
Subadviser. Under normal market conditions, the Fund invests at least 50% of its
total assets in equity securities that, in the view of the Subadviser, have the
potential for long-term growth of capital. The Fund invests in common stocks,
securities convertible into common stocks, non-convertible preferred stocks and
debt securities of U.S. and non-U.S. issuers. The Fund may also purchase and
sell options on debt and equity securities, on financial indices and foreign
currencies, and financial futures and options thereon. There can be no assurance
that the Fund's investment objective will be achieved. See "Investment Objective
and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated August 1, 1994, a copy of
which may be obtained from the Fund at One Seaport Plaza, New York, New York
10292.
TABLE OF CONTENTS
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ----------
General Information and History ............ B-2 16
Investment Objective and Policies .......... B-2 7
Investment Restrictions .................... B-14 11
Directors and Officers ..................... B-16 12
Manager .................................... B-18 12
Distributor ................................ B-19 12
Portfolio Transactions and Brokerage ....... B-21 14
Purchase and Redemption of Fund Shares ..... B-22 17
Shareholder Investment Account ............. B-24 26
Net Asset Value ............................ B-27 14
Performance Information .................... B-28 15
Taxes, Dividends and Distributions ......... B-29 15
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants ................................ B-31 14
Financial Statements ....................... B-32 --
Report of Independent Accountants .......... B-42 --
- --------------------------------------------------------------------------------
MF114B
<PAGE>
GENERAL INFORMATION AND HISTORY
The Fund was incorporated in Maryland on March 21, 1983 under the name
Prudential-Bache Research Fund, Inc. On October 24, 1991, at a special meeting
of shareholders, shareholders approved a change in the name of the Fund to
Prudential Growth Fund, Inc. At a special meeting held on July 19, 1994,
shareholders approved an amendment to the Fund's Articles of Incorporation to
change the Fund's name from Prudential Growth Fund, Inc. to Prudential
Strategist Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high total return (capital
appreciation plus dividend and interest income) consistent with reasonable risk.
There can be no assurance that the Fund's investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" in the Prospectus.
FOREIGN GOVERNMENT SECURITIES
Foreign government securities in which the Fund may invest include debt
securities issued or guaranteed as to payment of principal and interest by
governments, quasi-governmental entities, government agencies, supranational
entities and other governmental entities (collectively, Government Entities) of
the countries specified below and denominated in the currencies of such
countries or in U.S. dollars, including debt securities of a Government Entity
in any such country denominated in the currency of another such country.
NORTH AMERICA PACIFIC EUROPE
------------- ------- ------
Canada Australia Austria
Hong Kong Belgium
Japan Denmark
New Zealand Finland
Singapore France
Germany
Ireland
Italy
The Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
A supranational entity is an entity constituted by the national governments
of several countries to promote economic development, such as the World Bank
(International Bank for Reconstruction and Development), the European Investment
Bank and the Asian Development Bank. Debt securities of quasi-governmental
entities are issued by entities owned by either a national, state or equivalent
government or are obligations of a political unit that is not backed by the
national government's full faith and credit and general taxing powers. These
include, among others, the Province of Ontario and the City of Stockholm.
Foreign government securities also include debt securities denominated in
European Currency Units of an issuer in one of the foregoing countries
(including supranational issuers). A European Currency Unit represents specified
amounts of the currencies of certain of the twelve member states of the European
Community.
The Fund will invest in foreign government securities rated "A" or better
by Standard & Poor's Ratings Group (S&P) or Moody's Investors Service (Moody's)
or in non-rated securities which, in the opinion of Greg A. Smith Asset
Management Corporation (the Subadviser), are of comparable quality. The Fund
will invest only in foreign currency denominated government debt securities that
are freely convertible into U.S. dollars without legal restriction at the time
of purchase.
Investment in foreign government securities involves additional risks and
considerations not typically associated with investing in U.S. Government
securities and domestic issuers. See "How the Fund Invests--Investment
Objectives and Policies--Foreign Investments" in the Prospectus.
CORPORATE OBLIGATIONS
The Fund does not intend to have more than 5% of its net assets invested in
either asset-backed securities, collateralized mortgage obligations or real
estate mortgage investment conduits.
B-2
<PAGE>
ASSET-BACKED SECURITIES. Through the use of trusts and special purpose
subsidiaries, various types of assets, primarily automobile and credit card
receivables, are being securitized in pass-through structures similar to
mortgage pass-through structures or in a pay-through structure similar to the
collateralized mortgage structure. The Fund may invest in these and other types
of asset-backed securities which may be developed in the future. Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables are
generally unsecured. In connection with automobile receivables, the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In general, these types of loans are of shorter duration than mortgage loans and
are less likely to have substantial prepayments.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS (REMICS). A CMO is a debt security that is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation to
make interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed securities. CMOs generally are partitioned into
several classes with a ranked priority as to the time that principal payments
will be made with respect to each of the classes. The Fund may invest only in
privately-issued CMOs that are collateralized by mortgage-backed securities
issued or guaranteed by GNMA, FHLMC or FNMA and in CMOs issued by FHLMC.
The Fund may also invest in REMICs. An issuer of REMICs may be a trust,
partnership, corporation, association, or a segregated pool of mortgages, or may
be an agency of the U.S. Government and, in each case, must qualify and elect
treatment as such under the Tax Reform Act of 1986. A REMIC must consist of one
or more classes of "regular interests," some of which may be adjustable rate,
and a single class of "residual interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly secured,
principally by real property. The Fund does not intend to invest in residual
interests. REMICs are intended by the U.S. Congress ultimately to become the
exclusive vehicle for the issuance of multi-class securities backed by real
estate mortgages. Beginning January 1, 1992, if a trust or partnership that
issues CMOs does not elect or qualify for REMIC status, it will be taxed at the
entity level as a corporation.
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including:
1. Obligations denominated in U.S. dollars (including certificates of
deposit and banker's acceptances) of (a) banks organized under the laws of the
United States or any state thereof (including foreign branches of such banks) or
(b) U.S. branches of foreign banks or (c) foreign banks and foreign branches
thereof; provided that such banks have, at the time of acquisition by the Fund
of such obligations, total assets of not less than $1 billion or its equivalent.
The term "certificates of deposit" includes both Eurodollar certificates of
deposit, for which there is generally a market, and Eurodollar time deposits,
for which there is generally not a market. "Eurodollars" are U.S. dollars
deposited in banks outside the United States.
2. Commercial paper, variable amount demand master notes, bills, notes and
other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions, maturing
in one year or less, denominated in U.S. dollars, and, at the date of
investment, rated at least "A-2" by S&P or "Prime-2" by Moody's, or, if not
rated, issued by an entity having an outstanding unsecured debt issue rated at
least "A" or "A-2" by S&P or "A" or "Prime- 2" by Moody's. If such obligations
are guaranteed or supported by a letter of credit issued by a bank, the bank
(including a foreign bank) must meet the requirements set forth in paragraph 1
above. If such obligations are guaranteed or insured by an insurance company or
other non-bank entity, the insurance company or other non-bank entity must
represent a credit of high quality, as determined by the Fund's Subadviser,
under the supervision of the Board of Directors.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities to brokers or dealers in corporate
or government securities, banks or other recognized institutional borrowers of
securities provided that cash or equivalent collateral or a letter of credit in
favor of the Fund in an amount equal to at least 100% of the market value of the
securities loaned is continuously maintained by the borrower with the Fund.
During the time portfolio securities are on loan, the borrower pays the Fund an
amount equivalent to any dividend 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. As a matter
of fundamental policy, the Fund may not lend more than 10% of the value of its
total assets. 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.
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REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Board of Directors.
The Fund's Subadviser will monitor the creditworthiness of such parties, under
the general supervision of the Board of Directors. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will suffer a loss.
OPTIONS ON SECURITIES
The Fund may purchase put and call options and write covered put and call
options on equity and debt securities. These may include options traded on
national securities exchanges and options traded in the over-the-counter market
(OTC options). Currently, many options on equity securities are exchange-traded,
whereas options on debt securities are primarily traded on the over-the-counter
market.
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. The Fund's principal objective in
writing options is to realize, through the receipt of premiums, a greater return
than would be realized on the underlying securities alone.
The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price (the
exercise price or strike price). By writing a call option, the Fund becomes
obligated during the term of the option, upon exercise of the option, to sell,
depending upon the terms of the option contract, the underlying securities or a
specified amount of cash to the purchaser against receipt of the exercise price.
When the Fund writes a call option, the Fund loses the potential for a gain by
disposing of the underlying securities at an amount in excess of the exercise
price of the option during the period that the option is open.
Conversely, the purchaser of a put option has the right, for a specified
period of time, to sell the securities subject to the option to the writer of
the put at the specified exercise price. By writing a put option, the Fund
becomes obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
The Fund may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the "covered" option, or will establish and maintain with its Custodian for the
term of the option a segregated account consisting of cash, U.S. Government
securities or other liquid high-grade debt obligations having a value at least
equal to the fluctuating market value of the optioned securities. A put option
written by the Fund will be considered "covered" if, so long as the Fund is
obligated as the writer of the option, it owns an option to sell the underlying
securities subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option, or it deposits and maintains
with its Custodian in a segregated account cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater than
the exercise price of the option.
The Fund may write both American style options and European style options.
An American style option is an option which may be exercised by the holder at
any time prior to its expiration. A European style option, however, may only be
exercised as of the expiration of the option. The writer of an American style
option has no control over when the underlying securities must be sold, in the
case of a call option, or purchased, in the case of a put option, since such
options may be exercised by the holder at any time prior to the expiration of
the option. Whether or not an option expires unexercised, the writer retains the
amount of the premium. This amount may be offset or exceeded, in the case of a
covered call option, by a decline and, in the case of a covered put option, by
an increase in the market value of the underlying security during the option
period. If a call option is exercised, the writer must fulfill the obligation to
sell the underlying security at the exercise price, which will usually be lower
than the then market value of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the underlying
security at the exercise price, which will usually exceed the then market value
of the underlying security.
The writer of an exchange-traded option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option of the same series as the option previously written. (Options
of the same series are options with respect to the same underlying security,
having the same expiration date and the same strike price). The effect of the
purchase is that the writer's position will be canceled by the exchange's
affiliated clearing organization. However, the writer of an option may not
effect a closing purchase transaction after being notified of the exercise of
the option. Likewise, an investor who is the holder of an option may liquidate a
position by effecting a "closing sale transaction." This is accomplished by
selling an option
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<PAGE>
of the same series as the option previously purchased. There is no guarantee
that either a closing purchase or a closing sale transaction can be effected.
An exchange-traded option position may be closed out only where there
exists a secondary market for an option of the same series. If a secondary
market does not exist, it might not be possible to effect closing transactions
in a particular option the Fund has purchased with the result that the Fund
would have to exercise the option in order to realize any profit. If the Fund is
unable to effect a closing purchase transaction in a secondary market in an
option the Fund has written, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise or
it otherwise covers its position. Reasons for the absence of a liquid secondary
market include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by a securities exchange
(Exchange) on opening transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an Exchange; (v)
the facilities of an Exchange or clearing organization may not at all times be
adequate to handle current trading volume; or (vi) one or more Exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue trading of options (or a particular class or series of options), in
which event the secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options would continue to be
exercisable in accordance with their terms.
Exchange-traded options in the United States are issued by clearing
organizations affiliated with the Exchange on which the option is listed which,
in effect, gives its guarantee to every exchange-traded option transaction. In
contrast, over-the-counter (OTC) options are contracts between the Fund and its
counterparty with no clearing organization guarantee. Thus when the Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction. The
Board of Directors will evaluate the creditworthiness of any dealer from which
the Fund proposes to purchase options.
Exchange-traded options generally have a continuous liquid market while OTC
options may not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, 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 to which the
Fund originally wrote the OTC option. While the Fund will enter into OTC options
only with dealers which agree to, and which are expected to be capable of,
entering into closing transactions with the Fund, there can be no assurance that
the Fund will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. Until the Fund is able to effect a closing purchase
transaction in a covered OTC call option the Fund has written, it will not be
able to liquidate securities used as cover until the option expires or is
exercised or different cover is substituted. In the event of insolvency of the
counterparty, the Fund may be unable to liquidate an OTC option. With respect to
options written by the Fund, inability to enter into a closing purchase
transaction may result in material losses to the Fund. For example, since the
Fund must maintain a covered position with respect to any call option on a
security it writes, the Fund may be limited in its ability to sell the
underlying security while the option is outstanding. This may impair the Fund's
ability to sell a portfolio security at a time when such a sale might be
advantageous.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. The exercise price of the call the Fund determines to
write will depend upon the expected price movement of the underlying security.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. Buy-and-write transactions using at-the-money call options may be used
when it is expected that the price of the underlying security will remain fixed
or advance moderately during the option period. A buy-and-write transaction
using an out-of-the-money call option may be used when it is expected that the
premium received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be greater
than the appreciation in the price of the underlying security alone. If the call
option is exercised in such a transaction, the Fund's maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the Fund's purchase price of the security and the
exercise price of the option. If the option is not exercised and the price of
the underlying security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close out the position or
take delivery of the underlying security at the exercise price. In that case,
the Fund's return will be the premium received from writing the put option minus
the amount by which the market price of the
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<PAGE>
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money covered put options may be written by the Fund in the same market
environments in which call options are written in equivalent buy-and-write
transactions.
The Fund may purchase a call option on a security it intends to acquire in
order to hedge against (and thereby benefit from) an anticipated market
appreciation in the price of the underlying security at limited risk and with a
limited cash outlay. If the market price does rise as anticipated, the Fund will
benefit from that rise but only to the extent that the rise exceeds the premium
paid. If the anticipated rise does not occur or if it does not exceed the
premium, the Fund will bear the expense of the option premium without gaining an
offsetting benefit.
The Fund may purchase put options on securities to hedge against a decline
in the value of its portfolio. If the market price of the Fund's portfolio
should increase, however, the profit which the Fund might otherwise have
realized will be reduced by the amount of the premium paid for the put option
and by transaction costs. The Fund may purchase call options on securities to
hedge against an anticipated rise in the price it will have to pay for
securities it intends to buy in the future. If the market price of the
securities should fall instead of rise, however, the benefit the Fund obtains
from purchasing the securities at a lower price will be reduced by the amount of
the premium paid for the call options and by transaction costs.
The Fund may purchase put options if the Fund believes that a defensive
posture is warranted for all or a portion of its portfolio. Protection is
provided during the life of the put because the put gives the Fund the right to
sell the underlying security at the put exercise price, regardless of a decline
in the underlying security's market price below the exercise price. This right
limits the Fund's losses from the security's possible decline in value below the
strike price of the option to the premium paid for the put option and related
transaction costs.
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other carefully selected securities, the values of which historically have a
high degree of positive correlation to the values of such portfolio securities.
If the Subadviser's judgement is correct, changes in the value of the put
options should generally offset changes in the value of the portfolio securities
being hedged. But the correlation between the two values may not be as close in
these transactions as in transactions in which the Fund purchases a put option
on an underlying security it owns. If the Subadviser's judgement is not correct,
the value of the securities underlying the put option may decrease less than the
value of the Fund's portfolio securities and therefore the put option may not
provide complete protection against a decline in the value of the Fund's
portfolio securities below the level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other carefully selected securities, the values of which historically have a
high degree of positive correlation to values of securities that the Fund
intends to acquire. In such circumstances the Fund will be subject to risks
analogous to those summarized immediately above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Fund is not as close as anticipated
and the value of the securities underlying the call options increases less than
the value of the securities to be acquired by the Fund.
OPTIONS ON STOCK INDICES
Options on stock indices 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. Unlike stock options, all settlements are in cash.
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 indices may have
different multipliers.
Except as described below, the Fund will write call options on indices only
if on such date it holds a portfolio of securities at least equal to the value
of the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, cash, cash equivalents or at least one "qualified
security" with a market value at the time the option is written of not less than
100% of the current index value times the multiplier times the number of
contracts. The Fund will write call options on broadly-based stock market
indices only if at the time of writing it holds a diversified portfolio of
stocks.
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<PAGE>
If the Fund has written an option on an industry or market segment index,
it will so segregate or put into escrow with its Custodian, or pledge to a
broker as collateral for the option, at least ten "qualified securities," which
are stocks of an issuer in such industry or market segment, with a market value
at the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts. Such stocks will
include stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Fund's holdings in
that industry or market segment. No individual security will represent more than
15% of the amount so segregated, pledged or escrowed in the case of broadly-
based stock market index options or 25% of such amount in the case of industry
or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the Fund will
segregate, escrow or pledge an amount in cash, Treasury bills or other
high-grade short-term debt obligations equal in value to the difference. In
addition, when the Fund writes a call on an index which is in-the-money at the
time the call is written, the Fund will segregate with its Custodian or pledge
to the broker as collateral cash, U.S. Government or other high-grade short-term
debt obligations equal in value to the amount by which the call is in-the-money
times the multiplier times the number of contracts. Any amount segregated
pursuant to the foregoing sentence may be applied to the Fund's obligation to
segregate additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or quoted on NASDAQ against
which the Fund has not written a stock call option and which has not been hedged
by the Fund by the sale of stock index futures. However, if the Fund holds a
call on the same index as the call written where the exercise price of the call
held is equal to or less than the exercise price of the call written or greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, Treasury bills or other high-grade short-term debt obligations
in a segregated account with its Custodian, it will not be subject to the
requirements described in this paragraph.
RISKS OF OPTIONS ON STOCK INDICES. Index prices may be distorted if trading
of certain securities included in the index is interrupted. Trading in the index
options also may be interrupted in certain circumstances, such as if trading
were halted in a substantial number of securities included in the index. If this
occurred, the Fund would not be able to close out options which it had purchased
or written and, if restrictions on exercise were imposed, may be unable to
exercise an option it holds, which could result in substantial losses to the
Fund. It is the Fund's policy to purchase or write options only on indices which
include a number of securities sufficient to minimize the likelihood of a
trading halt in the index.
SPECIAL RISKS OF WRITING CALLS ON STOCK INDICES. 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 value 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 securities 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 portfolio in order to make settlement in cash, and the
price of such securities might decline before they can be sold. This timing risk
makes certain strategies involving more than one option substantially more risky
with index options than with stock options. For example, even if an index call
which the Fund has written is "covered" by an index call held by the Fund with
the same strike price, the Fund will bear the risk that the level of the index
may decline between the close of trading on the date the exercise notice is
filed with the clearing corporation and the close of trading on the date the
Fund exercises the call it holds or the time the Fund sells the call, which in
either case would occur no earlier than the day following the day the exercise
notice was filed.
FUTURES CONTRACTS
The Fund will enter into futures contracts only for certain bona fide
hedging, yield enhancement and risk management purposes. The Fund may enter into
futures contracts for the purchase or sale of equity and debt securities,
aggregates of debt securities or indices of prices thereof, aggregates of equity
securities or indices of prices thereof, and other financial indices. It may
also enter into futures contracts for the purchase or sale of foreign currencies
(such as the Japanese Yen, the British Pound and the Deutsche Mark) or composite
foreign currencies (such as the European Currency Unit) in which securities held
or to be acquired by the Fund are denominated, or the value of which have a high
degree of positive correlation to the value of such currencies as to constitute
an appropriate vehicle for hedging. The Fund may enter into such futures
contracts on U.S. exchanges.
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<PAGE>
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures contracts are settled on a net cash payment basis rather than by the
sale and delivery of the securities or currency underlying the futures
contracts. U.S. futures contracts have been designed by exchanges that have been
designated as "contract markets" by the Commodity Futures Trading Commission
(the CFTC), an agency of the U.S. Government, and must be executed through a
futures commission merchant (i.e., a brokerage firm) which is a member of the
relevant contract market. Futures contracts trade on these contract markets and
the exchange's affiliated clearing organization guarantees performance of the
contracts as between the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment (initial margin). It is expected that
the initial margin on U.S. exchanges will vary from 3 to 15% of the value of the
securities or the commodities underlying the contract. Under certain
circumstances, however, such as periods of high volatility, the Fund may be
required by an exchange to increase the level of its initial margin payment.
Thereafter, the futures contract is valued daily and the payment in cash of
"variation margin" may be required, a process known as "mark to market." Each
day the Fund is required to provide or is entitled to receive variation margin
in an amount equal to any decline (in the case of a long futures position) or
increase (in the case of a short futures position) in the contract's value since
the preceding day.
Although futures contracts by their terms may call for the actual delivery
or acquisition of underlying securities or currency, in most cases the
contractual obligation is extinguished or offset before the expiration of the
contract without having to make or take delivery of the securities or currency.
The offsetting of a contractual obligation is accomplished by buying (to offset
an earlier sale) or selling (to offset an earlier purchase) an identical futures
contract calling for delivery in the same month. Such a transaction cancels the
obligation to make or take delivery of the underlying securities or currency. In
all transactions on a U.S. futures exchange the Fund will incur brokerage fees
and related transaction costs when it purchases or sells futures contracts.
The ordinary spreads between values in the cash and futures markets, due to
differences in the character of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial and
variation margin requirements. Rather than meeting additional variation
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationships between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing price distortions. Third,
from the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Increased participation by speculators in the futures market may cause
temporary price distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Subadviser may still not result
in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Fund, if the Subadviser's judgement
about the general direction of interest rates is incorrect, the Fund's overall
performances would be poorer than if it had not entered into any such contracts.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of debt securities held in
its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged
because it will have offsetting losses in its futures positions. In addition,
particularly in such situations, if the Fund has insufficient cash, it may have
to sell assets from its portfolio to meet daily variation margin requirements.
Any such sale of assets may, but will not necessarily, be at increased prices
which reflect the rising market. Consequently, the Fund may have to sell assets
at a time when it may be disadvantageous to do so.
If the Fund seeks to hedge against a decline in the value of its portfolio
securities, and sells futures contracts for that purpose on other securities
which historically have had a high degree of positive correlation to the value
of the portfolio securities, the value of its portfolio securities might decline
more rapidly than the value of a poorly correlated futures contract rises. In
that case, the hedge will be less effective than if the correlation had been
greater. In a similar but more extreme situation, the value of the futures
position might in fact decline while the value of portfolio securities holds
steady or rises. This would result in a loss that would not have occurred but
for the attempt to hedge.
OPTIONS ON FUTURES CONTRACTS
The Fund will also enter into options on futures contracts for certain bona
fide hedging, yield enhancement and risk management purposes. The Fund may
purchase put and call options and write (i.e., sell) "covered" put and call
options on futures contracts that are traded on U.S. futures exchanges. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, 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
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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 a short
futures position (if the option is a call) or a long futures 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 Fund will be considered "covered" with respect to a call option it
writes on a futures contract if the Fund owns the securities or currency which
is deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
"covered" option and having an expiration date not earlier than the expiration
date of the "covered" option, or it segregates and maintains with its Custodian
for the term of the option cash, U.S. Government securities or other liquid
high-grade debt obligations equal to the fluctuating value of the optioned
futures. The Fund will be considered "covered" with respect to a put option it
writes on a futures contract if it owns an option to sell that futures contract
having a strike price equal to or greater than the strike price of the "covered"
option and having an expiration date not earlier than the expiration date of the
"covered" option, or if it segregates and maintains with its Custodian for the
term of the option cash, U.S. Government securities or liquid high-grade debt
obligations at all times equal in value to the exercise price of the put (less
any initial margin deposited by the Fund with its Custodian with respect to such
put option). There is no limitation on the amount of the Fund's assets which can
be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of securities the Fund intends to acquire. If
the futures price at expiration of the option is above the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase that may have occurred in the price of the securities
the Fund intends to acquire. If the market price of the underlying futures
contract when the option is exercised is below the exercise price, however, the
Fund will incur a loss, which may be wholly or partially offset by the decrease
in the value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holdings of debt securities. If the futures price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be wholly or partially offset by the increase of the
value of the securities in the Fund's portfolio which were being hedged.
The Fund will purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the debt securities it
owns as a result of rising interest rates or fluctuating currency exchange
rates. The Fund will also purchase call options on futures contracts as a hedge
against an increase in the value of securities the Fund intends to acquire as a
result of declining interest rates or fluctuating currency exchange rates.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON
The Fund will purchase or sell interest rate futures contracts to take
advantage of or to protect the Fund against fluctuations in interest rates
affecting the value of debt securities which the Fund holds or intends to
acquire. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an equivalent
value of the Fund's portfolio securities. If interest rates increase, the value
of the Fund's portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt securities
with longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make the
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will maintain in a segregated asset account with
the Fund's Custodian assets sufficient to cover the Fund's obligations with
respect to such futures contracts, which will consist of cash, U.S. Government
securities or other liquid, high-
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<PAGE>
grade debt obligations from its portfolio in an amount equal to the difference
between the fluctuating market value of such futures contracts and the aggregate
value of the initial margin deposited by the Fund with its Custodian with
respect to such futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
CURRENCY FUTURES AND OPTIONS THEREON
Generally, foreign currency futures contracts and options thereon are
similar to the interest rate futures contracts and options thereon. By entering
into currency futures and options thereon on U.S. exchanges, the Fund will seek
to establish the rate at which it will be entitled to exchange U.S. dollars for
another currency at a future time. By selling currency futures, the Fund will
seek to establish the number of dollars it will receive at delivery for a
certain amount of a foreign currency. In this way, whenever the Fund anticipates
a decline in the value of a foreign currency against the U.S. dollar, the Fund
can attempt to "lock in" the U.S. dollar value of some or all of the securities
held in its portfolio that are denominated in that currency. By purchasing
currency futures, the Fund can establish the number of dollars it will be
required to pay for a specified amount of a foreign currency in a future month.
Thus, if the Fund intends to buy securities in the future and expects the U.S.
dollar to decline against the relevant foreign currency during the period before
the purchase is effected, the Fund can attempt to "lock in" the price in U.S.
dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the Subadviser, in purchasing an
option, has been correct in its judgement concerning the direction in which the
price of a foreign currency would move as against the U.S. dollar, the Fund may
exercise the option and thereby take a futures position to hedge against the
risk it had correctly anticipated or close out the option position at a gain
that will offset, to some extent, currency exchange losses otherwise suffered by
the Fund. If exchange rates move in a way the Fund did not anticipate, however,
the Fund will have incurred the expense of the option without obtaining the
expected benefit. Such movement in exchange rates may also thereby reduce,
rather than enhance, the Fund's profits on its underlying securities
transactions.
OPTIONS ON CURRENCIES
Instead of purchasing or selling futures or forward currency exchange
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies either on exchanges or in over-the-counter
markets or by writing put options or covered call options on currencies. A put
option gives the Fund the right to sell a currency at the exercise price until
the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both options serve to
insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Fund to fully hedge its positions by purchasing such options.
As in the case of interest rate futures contracts and options thereon, the
Fund may hedge against the risk of a decrease or increase in the U.S. dollar
value of a foreign currency denominated security which the Fund owns or intends
to acquire by purchasing or selling options contracts, futures contracts or
options thereon with respect to a foreign currency other than the
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foreign currency in which such security is denominated, where the values of such
different currencies (vis-a-vis the U.S. dollar) historically have a high degree
of positive correlation.
SPECIAL CHARACTERISTICS OF FORWARD CURRENCY CONTRACTS AND ASSOCIATED RISKS
The Fund may use forward currency contracts to protect against uncertainty
in the level of future exchange rates. The Fund will not speculate with forward
currency contracts or foreign currency exchange rates. A forward currency
contract involves bilateral obligations of one party to purchase, and another
party to sell, a specified currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time the contract is entered into.
The Fund may enter into forward currency contracts with respect to specific
transactions. For example, 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 that 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 payment, as the case
may be. By entering into a forward contract for the purchase or sale, for a
fixed amount, the Fund will thereby be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
The Fund also may use forward currency contracts to lock in the U.S. dollar
value of portfolio positions, to increase the Fund's exposure to foreign
currencies that the Subadviser believes may rise in value relative to the U.S.
dollar or to shift the Fund's exposure to foreign currency fluctuations from one
country to another. For example, when the Subadviser believes that the currency
of a particular foreign country may suffer a substantial decline relative to the
U.S. dollar or another currency, it may enter into a forward contract to sell
the amount of the former foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it is sold. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and, therefore, the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and the related transaction costs. The Fund may enter into
forward contracts or maintain a net exposure on such contracts only if (1) the
consummation of the contracts would not 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 or (2) the Fund maintains cash, U.S.
Government securities or liquid, high-grade debt securities in a segregated
account in an amount not less than the value of the Fund's total assets
committed to the consummation of the contract. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. However, the Subadviser 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 be served.
At or before the maturity of a forward contract requiring the Fund to sell
a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing the same amount of
the currency that it is obligated to deliver. Similarly, the Fund may close out
a forward contract requiring it to purchase a specified currency by entering
into a second contract entitling it to sell the same amount of the same currency
on the maturity date of the first contract. The Fund would realize a gain or
loss as a result of entering into such an offsetting forward currency contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first contract and
the offsetting contract.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
The use of forward contracts does not eliminate fluctuations in the prices of
the underlying securities the Fund owns or intends to acquire, but does fix a
rate of exchange in advance. In addition, although forward currency contracts
limit the risk of loss due to a decline in the value of the hedged currencies,
at the same time they limit any potential gain that might result should the
value of the currencies increase.
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Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund may convert foreign currency 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 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.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES AND CURRENCIES, FUTURES CONTRACTS,
OPTIONS ON FUTURES CONTRACTS AND FORWARD CONTRACTS
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
If so, this would limit the ability of the Fund fully to hedge itself against
these risks.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions in such options
is subject to the maintenance of a liquid secondary market. To mitigate this
problem, the Fund will not purchase or write options on foreign currency futures
contracts unless and until, in the Subadviser's opinion, the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the purchase or sale
of foreign currency futures contracts, the purchase of call or put options
thereon involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the option (plus transaction costs). However, there
may be circumstances when the purchase of a call or put option on a foreign
currency futures contract would result in a loss, such as when there is no
movement in the price of the underlying currency or futures contract, when use
of the underlying futures contract would not.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options market until they
reopen. Because foreign currency transactions occurring in the interbank market
involve substantially larger amounts than those that may be involved in the use
of foreign currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
The value of foreign currency options depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
A holder of a stock index option who exercises it before the closing index
value for that day is available runs the risk that the level of the underlying
index may subsequently change. For example, in the case of a call, if such a
change causes the closing index value to fall below the exercise price of the
option on that index, the exercising holder will be required to pay the
difference between the closing index value and the exercise price of the option.
SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES CONTRACTS AND OPTIONS THEREON
Although the Fund generally will purchase or sell only those futures
contracts and options thereon for which there appears to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any
particular futures contract or option thereon at any particular time. In the
event no liquid market exists for a particular futures contract or option
thereon in which the Fund maintains a position, it will not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the Fund would have to either make or take delivery under the futures
contract or, in the case of a written option, wait to sell the underlying
securities until the option expires or is exercised or, in the case of a
purchased option, exercise the option. In the case of a futures contract or an
option on a futures contract which the Fund has written and which the Fund is
unable to close, the Fund would be required to maintain margin deposits on the
futures contract or option and to make variation margin payments until the
contract is closed.
Successful use of futures contracts and options theron by the Fund is
subject to the ability of the Fund's Subadviser to predict correctly movements
in the direction of interest rates and other factors affecting markets for
securities. If the Subadviser's expectations are not met, the Fund would be in a
worse position than if a hedging strategy had not been pursued. For example, if
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the Fund had hedged against the possiblity of an increase in interest rates
which would adversely affect the price of securities in its portfolio and the
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 have to sell securities to meet such requirements. Such sales of securities
may, but will not necessarily, be at increased prices which reflect the rising
market. Furthermore, the Fund may have to sell securities at a time when it is
disadvantageous to do so.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS
The Fund will engage in transactions in interest rate and foreign currency
futures contracts and options thereon only for bona fide hedging, yield
enhancement and risk management purposes, in each case in accordance with the
rules and regulations of the CFTC, and not for speculation.
In accordance with CFTC regulations, the Fund may not purchase or sell
futures contracts or options thereon if immediately thereafter the sum of the
amounts of initial margin deposits on the Fund's existing futures and premiums
paid for options on futures would exceed 5% of the market values of the Fund's
total assets; provided, however, that in case of an option that is "in the
money" at the time of the purchase, the "in the money" amount may be excluded in
calculating the 5% limitation. In instances involving the purchase of futures
contracts or call options thereon, or the writing of put options thereon by the
Fund, an amount of cash, U.S. Government securities or other liquid, high-grade
debt obligations, equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be deposited in a segregated
account with its custodian to cover the position, or alternative cover will be
employed thereby insuring that the use of such futures contracts and options is
unleveraged.
The Fund's purchase and sale of futures contracts and purchase and writing
of options on futures contracts will be for the purpose of protecting its
portfolio against anticipated future changes in interest rates which might
otherwise either adversely affect the value of the Fund's portfolio securities
or adversely affect the price of securities that the Fund intends to purchase at
a later date. As an alternative to bona fide hedging as defined by the CFTC, the
Fund may comply with a different standard established by CFTC rules with respect
to futures contracts and options thereon purchased by the Fund incidental to the
Fund's activities in the securities markets, under which the value of the assets
underlying such positions will not exceed the sum of (a) cash set aside in an
identifiable manner or short-term U.S. Government or other U.S.
dollar-denominated high-grade short-term debt securities segregated for this
purpose, (b) cash proceeds on existing investments due within thirty days and
(c) accrued profits on the particular futures contracts or option thereon.
In addition, CFTC regulations may impose limitations on the Fund's ability
to engage in certain yield enhancement and risk management strategies. There are
no limitations on the Fund's use of futures contracts and options on futures
contracts beyond the restrictions set forth above and the economic limitations
that are implicit in the use of futures and options on futures, within these
restrictions, only for bona fide hedging, yield enhancement and risk management
purposes, in each case in accordance with rules and regulations of the CFTC and
not for speculation.
Although the Fund intends to purchase or sell futures and options on
futures only on exchanges where there appears to be an active market, there is
no guarantee that an active market will exist for any particular contract or at
any particular time. If there is not a liquid market at a particular time, it
may not be possible to close a futures position at such time, and, in the event
of adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, when futures positions are used to
hedge portfolio securities, such securities will not be sold until the futures
positions can be liquidated. In such circumstances, an increase in the price of
securities, if any, may partially or completely offset losses on the futures
contracts.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
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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 commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). In addition, in order for commercial paper that is issued in reliance
on Section 4(2) of the Securities Act to be considered liquid, (i) it must be
rated in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
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 maintain, in a segregated account of the Fund, cash, U.S.
Government securities or other liquid high-grade debt obligations having a value
equal to or greater than the Fund's purchase commitments; the Custodian will
likewise segregate securities sold on a delayed delivery basis.
PORTFOLIO TURNOVER
Numerous factors, including those relating to particular investments, market
or economic conditions or redemptions of Fund shares, may affect the rate at
which the Fund buys or sells portfolio securities from year to year. This rate,
which is commonly referred to as the "portfolio turnover rate," is calculated by
dividing the average monthly value of the portfolio during a year into the
lesser of the purchases or sales in the year, excluding all short-term
securities. The Fund has no fixed policy with respect to portfolio turnover;
however, it is anticipated that the Fund's annual portfolio turnover rate will
not normally exceed 100%. For the fiscal years ended February 28, 1994 and
February 28, 1993, the Fund's portfolio turnover rate was 178% and 99%,
respectively.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
B-14
<PAGE>
The Fund may not:
(1) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions and except that the Fund may make
deposits on margin in connection with futures contracts and options.
(2) Make short sales of securities (other than short sales against-the-box)
or maintain a short position, if when added together, more than 25% of the value
of the Fund's net assets would be (i) deposited as collateral for the obligation
to replace securities borrowed to effect short sales and (ii) allocated to
segregated accounts in connection with short sales.
(3) 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 purposes of this restriction,
obligations of the Fund to Directors pursuant to deferred compensation
arrangements, the purchase and sale of securities on a when-issued or delayed
delivery basis and the purchase and sale of options, futures contracts and
options on futures contracts and collateral arrangements with respect to the
purchase and sale of options, futures contracts and options on futures contracts
are not deemed to be the issuance of a senior security or a pledge of assets.
(4) Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if as a result: (i) with respect to 75% of
the Fund's portfolio, more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer, or (ii) more
than 25% of the Fund's total assets (taken at current value) would be invested
in a single industry.
(5) Purchase any security if as a result the Fund would then hold more than
10% of any class of securities of an issuer (taking all common stock issues of
an issuer as a single class, all preferred stock issues as a single class, and
all debt issues as a single class) or more than 10% of the outstanding voting
securities of an issuer.
(6) Purchase any security if as a result the Fund would then have more than
5% of its total assets (taken at current value) invested in securities of
companies (including predecessors) less than three years old.
(7) Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell futures contracts,
options on futures contracts and securities which are secured by real estate and
securities of companies which invest or deal in real estate.
(8) Act as an underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
(9) Make investments for the purpose of exercising control or management.
(10) Invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 10% of its total assets (taken at current
value) would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the common stocks of companies
which invest in or sponsor such programs.
(12) Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 10% of the Fund's total assets).
(13) Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (taken at current value) invested in warrants.
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.
In order to comply with certain state "blue sky" restrictions, the Fund
will not as a matter of operating policy:
1. Purchase warrants if as a result the Fund would have more than 5% of its
assets (determined at the time of investment) invested in warrants. Warrants
will be valued at the lower of cost or market and investment in warrants which
are not listed on the New York Stock Exchange, American Stock Exchange or any
major foreign stock exchange will be limited to 2% of the Fund's net assets.
2. Invest in securities of any issuer if, to the knowledge of the Fund, any
officer or Director of the Fund or the Fund's Manager or Subadviser owns more
than 1/2 of 1% of the outstanding securities of such issuer, and such officers
and Directors who own more than 1/2 of 1% own in the aggregate more than 5% of
the outstanding securities of such issuer.
B-15
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
<S> <C> <C>
John C. Davis Director Retired (since December 1982); formerly Senior Vice President,
c/o Prudential Mutual Fund Executive Department and Director, The Atchison, Topeka and
Management, Inc. Santa Fe Railway Company and Vice President and Director,
One Seaport Plaza Santa Fe Industries, Inc.
New York, New York
*Lawrence C. McQuade President and Vice Chairman of Prudential Mutual Fund Management, Inc.
One Seaport Plaza Director (PMF) (since 1988); Managing Director, Investment Banking,
New York, New York of Prudential Securities Incorporated (Prudential Securities)
(1988-1991); Director of Quixote Corporation (since February
1992) and BUNZL, PLC (since June 1991); formerly Director
of Crazy Eddie, Inc. (1987-1990); formerly Director of Kaiser
Tech., Ltd. and Kaiser Aluminum and Chemical Corp. (March 1987
-November 1988); formerly Executive Vice President and Director
of W.R. Grace & Company (until 1988); President and Director of
The High Yield Income Fund, Inc., The Global Government Plus
Fund, Inc. and The Global Yield Fund, Inc.
Thomas A. Owens, Jr. Director Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, New York
*Richard A. Redeker Director President, Chief Executive Officer and Director (since October
One Seaport Plaza 1993), PMF; Executive Vice President, Director and
New York, New York Member of the Operating Committee (since October 1993),
Prudential Securities; Director (since October 1993)
of Prudential Securities Group, Inc.; formerly Senior Executive
Vice President and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director of The Global Yield
Fund, Inc., The Global Government Plus Fund, Inc. and The High
Yield Income Fund, Inc.
Gerald A. Stahl Director President, Rochester Lumber Company.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, New York
Stephen Stoneburn Director Senior Vice President and Managing Director, Cowles Business
c/o Prudential Mutual Fund Media (since January 1993); Senior Vice President (January
Management, Inc. 1991-1992) and Publishing Vice President (May 1989-
One Seaport Plaza December 1990) of Gralla Publications, a division of United
New York, New York Newspapers, U.K.; formerly Senior Vice President of Fairchild
Publications, Inc.
B-16
<PAGE>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
Robert H. Wellington Director Retired (since January 1994); formerly Chairman and Chief
c/o Prudential Mutual Fund Executive Officer, AMSTED Industries, Incorporated
Management, Inc. (diversified manufacturer of railroad, construction and
One Seaport Plaza industrial products) (December 1988-December 1993);
New York, New York Director of AMSTED Industries, Incorporated, Centel
Corporation, L.E. Meyers, Co. and DeSoto Inc.
David W. Drasnin Vice President Vice President and Branch Manager of Prudential Securities.
39 Public Square
Suite 500
Wilkes Barre, Pennsylvania
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990), Director (since
One Seaport Plaza January 1989) and Executive Vice President, Treasurer and
New York, New York Chief Financial Officer (since June 1987) of PMF; Senior Vice
President (since March 1987) of Prudential Securities;
Vice President and Director of The Asia Pacific Fund, Inc.
(since May 1989).
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior Counsel
One Seaport Plaza (since June 1987); formerly First Vice President (June 1987-
New York, New York December 1990) of PMF; Senior Vice President and Senior
Counsel (since July 1992) of Prudential Securities; formerly
Vice President and Associate General Counsel of Prudential
Securities.
Susan C. Cote Treasurer and Senior Vice President of PMF; Senior Vice President
One Seaport Plaza Principal (since January 1992) and Vice President (January
New York, New York Financial and 1986-December 1991) of Prudential Securities.
Accounting Officer
Deborah A. Docs Assistant Vice President and Associate General Counsel (since January
One Seaport Plaza Secretary 1993) of PMF; Vice President and Associate General Counsel
New York, New York (since January 1993) of Prudential Securities; previously
Associate Vice President (January 1990 - December 1992),
Assistant General Counsel (November 1991 - December 1992)
and Assistant Vice President (January 1989 - December 1989)
of PMF.
<FN>
- ------------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities or PMF.
</FN>
</TABLE>
Directors and officers of the Fund are also Trustees, Directors and
officers of some or all of the other investment companies distributed by
Prudential Securities or Prudential Mutual Fund Distributors Inc. (PMFD).
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Directors who is not an affiliated person of
Prudential Securities annual compensation of $7,500, in addition to certain
out-of-pocket expenses.
Directors may receive their Director's fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee in installments which accrue interest at
a rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
Bills at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of the Fund (the Fund rate). Payment of the
interest so accrued is also deferred and accruals become 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.
As of June 17, 1994, the Directors and officers of the Fund owned less than
1% of the outstanding common stock of the Fund.
B-17
<PAGE>
As of June 17, 1994, Prudential Securities was the record holder for other
beneficial owners of 181,449 Class A shares (or 61% of the outstanding Class A
shares) and 6,622,449 Class B shares (or 50% of the outstanding Class B shares)
of the Fund. As of March 31, 1994, there were no Class C shares outstanding. 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.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
of all of the other open-end management investment companies that, together with
the Fund, comprise the Prudential Mutual Funds. See "How the Fund is Managed" in
the Prospectus. As of June 30, 1994, PMF managed and/or administered open-end
and closed-end management investment companies with assets of approximately $47
billion and, according to the Investment Company Institute as of April 30, 1994,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's custodian, and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .625 of 1% of the first $500 million of the Fund's average
daily net assets, .55 of 1% of the next $500 million of the Fund's average daily
net assets, and .50 of 1% of the Fund's average daily net assets in excess of $1
billion. The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Fund (including the fees of
PMF, but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended February 28, 1994. Currently, the
Fund believes that the most restrictive expense limitation of state securities
commissions is 2-1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1-1/2% of such assets in excess of
$100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's Subadviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to Greg A. Smith Asset Management
Corporation pursuant to the subadvisory agreement between PMF and Greg A. Smith
Asset Management Corporation (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's Subadviser, (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 Securities and Exchange Commission, registering
the Fund and qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statements and prospectuses
for such purposes, (k) allocable communications expenses with respect to
investor services and all expenses of shareholders' and Directors' meetings and
of preparing, printing and mailing reports, proxy statements and prospectuses to
shareholders in the amount necessary for distribution to the shareholders, (l)
litigation and
B-18
<PAGE>
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act, on May 11, 1994 and by
shareholders of the Fund on October 24, 1991.
For the fiscal years ended February 28, 1994, February 28, 1993 and
February 29, 1992, PMF received management fees of $1,388,821, $1,564,820 and
$1,702,103, respectively.
PMF has entered into a Subadvisory Agreement (Subadvisory Agreement) with
Greg A. Smith Asset Management Corporation (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. PMF
continues to have responsibility for all investment advisory services pursuant
to the Management Agreement and supervises the Subadviser's performance of such
services. Prudential Securities served as the Fund's Subadviser until August 1,
1991 under the former subadvisory agreement. For the years ended February 28,
1994, February 28, 1993 and February 29, 1992, PMF paid $833,292, $938,892 and
$501,781, respectively, to Greg A. Smith Asset Management Corporation under the
current Subadvisory Agreement.
Pursuant to the Subadvisory Agreement, PMF compensates the Subadviser for
its services thereunder at an annual rate of .375 of 1% of the Fund's average
daily net assets up to $500 million, .35 of 1% of such amounts between $500
million and $1 billion and .30 of 1% of such amounts in excess of $1 billion.
The fee is computed daily and payable monthly. The Subadvisory Agreement also
provides that, in the event the expenses of the Fund (including the fees of the
Manager, 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 the Subadviser
will be reduced by 60% of the amount of such excess. The most restrictive
expense limitation of state securities commissions has been discussed previously
with respect to the Management Agreement.
The Subadvisory Agreement provides that the Subadviser will 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 the Subadvisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith, gross negligence or reckless
disregard of duty. The Subadvisory 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 Subadvisory Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 11, 1994, and by shareholders of the Fund on October 24, 1991.
The Manager is a subsidiary of The Prudential Insurance Company of America
(Prudential) which, as of December 31, 1993, is one of the largest financial
institutions in the world and the largest insurance company in North America.
Prudential has been engaged in the insurance business since 1875. In July 1993,
Institutional Investor ranked Prudential the third largest institutional money
manager of the 300 largest money management organizations in the United States
as of December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the Fund.
Prudential Securities Incorporated, One Seaport Plaza, New York, New York 10292,
acts as the distributor of the Class B and Class C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively, the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares. See "How the Fund is Managed--Distributor"
in the Prospectus.
B-19
<PAGE>
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 6, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Class A or Class B Plan or in any agreement related to either Plan (the Rule
12b-1 Directors), at a meeting called for the purpose of voting on each Plan,
adopted a new plan of distribution for the Class A shares of the Fund (the Class
A Plan) and approved an amended and restated plan of distribution with respect
to the Class B shares of the Fund (the Class B Plan). The Plans were last
approved by the Board of Directors including a majority of the 12b-1 Directors,
on April 15, 1992. The Class A Plan was approved by the Class A shareholders on
December 19, 1990. The Class B Plan was approved by shareholders of the Fund on
January 11, 1990. On February 3, 1993, the Board of Directors, including a
majority of the Rule 12b-1 Directors, at a meeting called for the purpose of
voting on each Plan, approved modifications to the Fund's Class A and Class B
Plans and Distribution Agreements to conform them to recent amendments to the
National Association of Securities Dealers (NASD) maximum sales charge rule
described below. As so modified, the Class A Plan provides that (i) up to .25 of
1% of the average daily net assets of the Class A shares may be used to pay for
personal service and the maintenance of shareholder accounts (service fee) and
(ii) total distribution fees (including the service fee of .25 of 1%) may not
exceed .30 of 1%. As so modified, the Class B Plan provides that (i) up to .25
of 1% of the average daily net assets of the Class B shares may be paid as a
service fee and (ii) up to .75 of 1% (not including the service fee) of the
average daily net assets of the Class B shares (asset-based sales charge) may be
used as reimbursement for distribution-related expenses with respect to the
Class B shares. On May 12, 1993, the Board of Directors, including a majority of
the Rule 12b-1 Directors, at a meeting called for the purpose of voting on each
Plan, adopted a plan of distribution for the Class C shares of the Fund and
approved further amendments to the plans of distribution for the Fund's Class A
and Class B shares changing them from reimbursement type plans to compensation
type plans. The Plans were last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 11, 1994. The Class A Plan, as
amended, was approved by Class A and Class B shareholders, and the Class B Plan,
as amended, was approved by Class B shareholders on July 19, 1994. The Class C
Plan was approved by the sole shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended February 28, 1994, PMFD received
payments of $8,690 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended February 28, 1994, PMFD also
received approximately $44,200 in initial sales charges.
CLASS B PLAN. For the fiscal year ended February 28, 1994, Prudential
Securities received $2,180,398 from the Fund under the Class B Plan, and spent
approximately $1,037,200 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately $10,600 was spent on printing
and mailing of prospectuses to other than current shareholders; $49,900 on
interest and/or carrying costs; $138,800 on compensation to Pruco Securities
Corporation, an affiliated broker-dealer, for commissions to its representatives
and other expenses, including an allocation on account of overhead and other
branch office distribution-related expenses, incurred by it for distribution of
Fund shares; and $837,900 on the aggregate of (i) payments of commissions and
account servicing fees to financial advisers $513,700 and (ii) an allocation on
account of overhead and other branch office distribution-related expenses
$324,200. The term "overhead and other branch office distribution-related
expenses" represents (a) the expenses of operating Prudential Securities branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares, and (d) other incidental
expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended February 28, 1994, Prudential
Securities received approximately $249,900 in contingent deferred sales charges.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales
Charges" in the Prospectus. Prior to the date of this Statement of Additional
Information, no distribution expenses were incurred under the Class C Plan.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
30 days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan) and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each
B-20
<PAGE>
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 will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 11, 1994.
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 the Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of any class, all sales
charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this Section, the
"Manager" includes the "Subadviser." Purchases and sales of securities on a
national securities exchange are effected through brokers who charge a
negotiated commission for their services. On a foreign securities exchange,
commissions may be fixed. Orders may be directed to any broker including, to the
extent and in the manner permitted by applicable law, Prudential Securities and
its affiliates.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities acts as principal.
Thus it will not deal in the over-the-counter securities with Prudential
Securities acting as market maker, and it will not execute a negotiated trade
with Prudential Securities if execution involves Prudential Securities' acting
as principal with respect to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, during the existence of the syndicate,
is a principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the Securities and Exchange 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. In placing orders for portfolio securities of the Fund, the
Manager is required to give primary consideration to obtaining the most
favorable price and efficient execution. Commission rates are established
pursuant to negotiations with the broker, dealer, or futures commission merchant
based on the quality and quantity of execution services provided by the broker,
dealer, or futures commission merchant in the light of generally prevailing
rates. The Manager's policy is to pay higher commissions to brokers, other than
Prudential Securities, for particular transactions than might be charged if a
different broker had been selected, on occasions when, in the Manager's opinion,
this policy furthers the objective of obtaining best price and execution. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Fund's Board of Directors.
Subject to the above considerations, Prudential Securities may act as a
broker for the Fund. In order for Prudential Securities to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by Prudential Securities must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow
Prudential Securities to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. Furthermore, the Board of Directors of the Fund, including a
majority of the noninterested Directors has adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to Prudential Securities are consistent with the foregoing standard.
Brokerage transactions with Prudential Securities are also subject to such
fiduciary standards as may be imposed upon Prudential Securities by applicable
law.
B-21
<PAGE>
The table presented below shows certain information regarding the payment
of commissions by the Fund, including the amount of such commissions paid to
Prudential Securities, for the three-year period ended February 28, 1994.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, 1994 FEBRUARY 29, 1993 FEBRUARY 28, 1992
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund .......... $916,600 $550,800 $1,016,000
Total brokerage commissions paid to
Prudential Securities ............................... $ 31,000 $ 79,650 $ 450,000
Percentage of total brokerage commissions paid to
Prudential Securities ............................... 3.4% 14.4% 44.3%
</TABLE>
The Fund effected approximately 3.8% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the fiscal year ended February 28, 1994. Of the total brokerage
commissions paid by the Fund for the fiscal year ended February 28, 1994,
approximately $885,600 (96.6%) was paid to firms which provided research,
statistical or other services to PMF. PMF has not separately identified a
portion of such brokerage commissions as applicable to the provision of
research, statistical or other services. The Subadviser has not separately
identified the portion of such brokerage commissions which relates to the
provision of such research, statistical or other services.
The writing of options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options in
each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different exchanges or are held or written in one or more accounts or through
one or more brokers. Thus, the number of options which the Fund may write may be
affected by options written by other investment advisory clients of its Manager.
An exchange may order the liquidations of positions found to be in excess of
these limits, and it may impose certain other sanctions.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares), or
(ii) on a deferred basis (Class B or Class C shares). See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the Securities and Exchange Commission in
connection with the offering of a conversion feature on Class B shares to submit
any amendment of the Class A distribution and service plan to both Class A and
Class B shareholders) and (iii) only Class B shares have a conversion feature.
See "Distributor." Each class also has separate exchange privileges. See
"Shareholder Investment Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 5%
and Class B* and Class C* shares are sold at net asset value. Using the Fund's
net asset value at February 28, 1994, the maximum offering price of the Fund's
shares would be as follows:
CLASS A
- -------
Net asset value and redemption price per Class A share .............. $15.11
Maximum sales charge (5% of offering price) ......................... .80
------
Offering price to public ............................................ $15.91
======
CLASS B
- -------
Net asset value, offering price and redemption
price per Class B share* .......................................... $14.99
======
CLASS C
- -------
Net asset value, offering price and redemption
price per Class C share* .......................................... $14.99
======
- ------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. Class C
shares did not exist on February 28, 1994.
B-22
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouses's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be controlled
by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds to (excluding money market
funds other than those acquired pursuant to the exchange privilege) determine
the reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
Accumulation are not available to individual participants in any retirement or
group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of Class A shares of
the Fund and Class A shares of other Prudential Mutual Funds. All Class A shares
of the Fund and Class A shares of other Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) which
were previously purchased and are still owned are also included in determining
the applicable reduction. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held directly with the
Transfer Agent or through Prudential Securities. The Distributor must be
notified at the time of purchase that the investor is entitled to a reduced
sales charge. The reduced sales charges will be granted subject to confirmation
of the investor's holdings. Letters of Intent are not available to individual
participants in retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's costs, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the
B-23
<PAGE>
sales charge otherwise applicable to the purchases made during this period and
sales charges actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain such difference. If the goal is exceeded in an amount which
qualifies for a lower sales charge, a price adjustment is made by refunding to
the purchaser the amount of excess sales charge, if any, paid during the
thirteen-month period. Investors electing to purchase Class A shares of the Fund
pursuant to a Letter of Intent should carefully read such Letter of Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of the Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certificate or, in the case of a trust, a copy
of the grantor's death certificate, plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be A copy of the Social Security Administration award letter or a letter from
considered disabled if he or she is a physician on the physician's letterhead stating that the shareholder
unable to engage in any substantial (or, in the case of a trust, the grantor) is permanently disabled. The
gainful activity by reason of any letter must also indicate the date of disability.
medically determinable physical or
mental impairment which can be expected
to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the custodial firm indicating (i) the date
Custodial Account 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 purchase 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:
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE --------------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
----------------- ---------------------- ---------------
First 3.0% 2.0%
Second 2.0% 1.0%
Third 1.0% 0%
Fourth and thereafter 1.0% 0%
You must notify the Fund's transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-24
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to the
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than 5 full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash rather than reinvested. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payment will be made directly to the dealer. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such distribution
at net asset value by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the net
asset value per share next determined after receipt of the check or proceeds by
the Transfer Agent. Such shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. See "Dividends, Distributions and Taxes." Shares may
be exchanged for shares of another fund only if shares of such fund may legally
be sold under applicable state laws. For retirement and group plan sharing a
limited menu of Prudential Mutual Funds, the Exchange Privilege is available for
those funds eligible for investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A and Class C
shares for Class A shares of certain other Prudential Mutual Funds, shares of
Prudential Government Securities Trust (Intermediate Term Series) and shares of
the money market funds specified below. No fee or sales load will be imposed
upon the exchange. Shareholders of money market funds who acquired such shares
upon exchange of Class A shares may use the Exchange Privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the Exchange
Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, 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.
B-25
<PAGE>
Class B and Class C shares of the Fund may also be exchanged for Class B
shares, respectively, of an eligible money market fund without imposition of any
CDSC at the time of exchange. Upon subsequent redemption from such money market
fund or after re-exchange into the Fund, such shares will be subject to the CDSC
calculated by excluding the time such shares were held in the money market fund.
In order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund without subjecting such shares to any CDSC. Shares of any
fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
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 $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 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)
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------- -------- -------- -------- --------
25 years ................... $ 110 $ 165 $ 220 $ 275
20 years ................... 176 264 352 440
15 years ................... 296 444 592 740
10 years ................... 555 833 1,110 1,388
5 years .................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- ------------
(1) Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics; and
the U.S. Department of Education. Average costs for private institutions include
tuition, fees, room and board.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest
B-26
<PAGE>
specified dollar amounts in shares of the Fund. The investor's bank must be a
member of the Automatic Clearing House System. Share certificates are not issued
to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automaticially reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with the purchases of additional shares
are inadvisable because of the sales charge applicable to (i) the purchase of
Class A shares and (ii) the withdrawal of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the systematic withdrawal plan, particularly if used in
connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparsion of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- ------- -----
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
- ------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
B-27
<PAGE>
NET ASSET VALUE
Net asset value is the net worth of the Fund (assets, including securities
at value, minus liabilities) divided by the number of shares outstanding. Net
asset value is calculated separately for each class. The value of investments,
traded on a national securities exchange and quoted by NASDAQ National Market
System, other than options on stocks, is based on the last sale prices as of the
close of the New York Stock Exchange (which is currently 4:00 P.M., New York
time), or, in the absence of recorded sales, at the average of readily available
closing bid and asked prices on such exchanges. Unlisted securities are valued
at the average of the quoted bid and asked prices in the over-the-counter
market. Stock options traded on national securities exchanges are valued as of
the close of options trading on such exchanges (which is currently 4:10 P.M.,
New York time). Securities or other assets for which market quotations are not
readily available are valued by appraisal at their fair value as determined in
good faith under procedures established by and under the general supervision of
the Fund's Board of Directors. Short-term investments which mature in 60 days or
less are valued at amortized cost if their original maturity was 60 days or
less, or by amortizing their value on the 61st day prior to maturity. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents.
The Fund will compute its net asset value once daily as of 4:15 P.M., New
York time, on days that 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 the net asset value. The New York Stock Exchange is
closed on the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
In the event that the New York Stock Exchange or the national securities
exchanges on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Board of Directors of the Fund will
reconsider the time at which net asset value is computed. In addition, the Fund
may compute its net asset value as of any time permitted pursuant to any
exemption, order or statement of the Securities and Exchange Commission or its
staff.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the net asset value per share of each class will tend to
converge immediately after the recording of dividends which will differ by
approximately the amount of the distribution-related expense accrual
differential among the classes.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund Calculates
Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P (1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000,
T = average annual total return,
n = number of years,
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000
investment made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one and four and
one-twelfth year periods ended February 28, 1994 was 3.10% and 6.61%,
respectively, for the Fund. The average annual total return for Class B shares
for the one, five and ten year periods ended February 28, 1994 was 3.02%, 7.92%
and 11.42%. During these periods, no Class C shares were outstanding.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B and
Class C shares. See "How the Fund Calculates Peformance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
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 federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-28
<PAGE>
The Fund's aggregate total return for Class A shares for the one and since
inception periods ended on February 28, 1994 was 8.81% and 37.26%. The aggregate
total return for the Class B shares for the one, five and ten year periods ended
February 28, 1994 was 8.02%, 47.40% and 195.06%, respectively. During these
periods, no Class C shares were outstanding.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
[The table below was represented as a graph in the printed material.]
A Look At Performance Over the Long-Term
(1926-1992)
Common Stocks ..................... Average Annual Return 10.3%
Long-Term Government Bonds ........ Average Annual Return 4.8%
Inflation ......................... 3.1%
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare semi-annual dividends of the Fund's net
investment income. Net capital gains, if any, will be distributed at least
annually. In determining amounts of capital gains to be distributed, any capital
loss carryforwards from prior years will offset capital gains. Distributions
will be paid in additional Fund shares based on the net asset value at the close
of business on the record date or any other date as determined by the Directors,
unless the shareholder elects in writing not less than five full business days
prior to the record date to receive such distributions in cash.
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code. In
order to qualify as a regulated investment company, the Fund must, among other
things, (a) derive at least 90% of its gross income from dividends, interest,
proceeds from securities loans, gains from the sale or other disposition of
securities or foreign currencies and other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in such securities or currencies; (b) derive less than
30% of its gross income from the sale or other disposition of securities held
less than three months; and (c) diversify its holdings so that, at the end of
each fiscal quarter, (i) at least 50% of the market value of the Fund's assets
is represented by cash, U.S. Government securities and other securities limited,
in respect of any one issuer, to an amount not greater than 5% of the 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). In addition, in order to
qualify as a regulated investment company, the Fund must distribute to its
shareholders as ordinary dividends at least 90% of its net investment income
including short-term capital gains.
B-29
<PAGE>
To the extent it does not meet certain distribution requirements by the end
of the calendar year, 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 will be long-term
capital gains or losses if the securities have been held by it for more than one
year, except in certain cases where the Fund acquires a put or a call thereon or
makes a short sale against-the-box. Other gains or losses on the sale of
securities will be short-term capital gains or losses. If an option written by
the Fund lapses or is terminated through a closing transaction, such as a
repurchase by the Fund of the option from its holder, the Fund will realize a
short-term capital gain or loss, depending on whether the premium income is
greater or less than the amount paid by the Fund in the closing transaction. If
securities are sold by the Fund pursuant to the exercise of a call option
written by it, the Fund will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by the Fund pursuant to the exercise of a put option
written by it, the Fund will subtract the premium received from its cost basis
in the securities purchased. Certain transactions of the Fund may be subject to
wash sale, short sale and straddle provisions of the Internal Revenue Code and
the 30% limitation on gains derived from securities held less than three months
may limit the Fund's ability to engage in such transactions. In addition, debt
securities acquired by the Fund may be subject to original issue discount and
market discount rules.
Special rules will apply to most options on stock indices, futures
contracts and options thereon, and forward foreign currency exchange contracts
in which the Fund may invest. See "Investment Objective and Policies." 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 forward foreign currency exchange contracts, 60% of any
gain or loss recognized on such "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. The Fund's ability to invest in forward
foreign currency exchange contracts, options on equity securities and on stock
indices, futures contracts and options thereon may be limited by the 30%
limitation on gains derived from securities held less than three months,
discussed above.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested in
various countries is not known.
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 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.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B and Class C shares. See "Net Asset Value."
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. Prior to purchasing shares of the Fund,
therefore, the investor should carefully consider the impact of dividends or
capital gains distributions which are expected to be or have been announced.
Dividends and distributions may also be subject to state and local taxes.
PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund has obtained a written letter
of determination from the Pennsylvania Department of Revenue that the Fund is
subject to the Pennsylvania foreign franchise tax based upon its business
activities in Pennsylvania. Accordingly, it is expected that Fund shares will be
exempt from Pennsylvania personal property taxes. The Fund anticipates that it
will continue such business activities but reserves the right to suspend them at
any time, resulting in the termination of the exemption.
OTHER TAX INFORMATION. The Fund may also be subject to state or local tax
in certain other states where it is deemed to be doing business. Further, in
those states which have income tax laws, the tax treatment of the Fund and of
shareholders of the Fund with respect to distributions by the Fund may differ
from federal tax treatment. Distributions to shareholders may be subject to
additional state and local taxes.
Statements as to the tax status of distributions shareholders of the Fund
will be mailed annually. Shareholders are urged to consult their own tax
advisers regarding specific questions as to federal, state or local taxes.
B-30
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.
Prudential Mutual Fund Services, Inc. ("PMFS"), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions, and related
functions. For these services, PMFS receives an annual fee per shareholder
account, a new account set-up fee for each manually-established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is also
reimbursed for its out-of-pocket expenses, including, but not limited to,
postage, stationery, printing, allocable communications expenses and other
costs. For the fiscal year ended February 28, 1994, the Fund incurred fees of
approximately $432,000 for the services of PMFS.
Price Waterhouse, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-31
<PAGE>
PRUDENTIAL GROWTH FUND, INC. Portfolio of Investments
February 28, 1994
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------ ----------- --------
<C> <S> <C>
LONG-TERM INVESTMENTS
Common Stock--85.7%
Aerospace/Defense--2.0%
45,000 Allied-Signal, Inc........... $ 3,436,875
15,000 Boeing Co.................... 701,250
------------
4,138,125
------------
Airlines--3.9%
100,000 AMR Corp..................... 5,025,000
90,000 Southwest Airlines Co........ 3,071,250
------------
8,096,250
------------
Asset Management--1.1%
45,000 John Nuveen Co............... 1,051,875
25,000 U.S. Trust Corp.............. 1,268,750
------------
2,320,625
------------
Banking--3.1%
45,000 C S Holding (ADR)
(Switzerland).............. 998,437
55,000 First Security Corp.......... 1,595,000
45,000 Leader Financial Corp.*...... 905,625
45,000 Southern National Corp....... 900,000
80,000 West One Bancorp............. 2,130,000
------------
6,529,062
------------
Business Services--5.3%
157,000 First Financial Mgmt.
Corp....................... 9,243,375
34,800 SPS Transaction Services..... 1,861,800
------------
11,105,175
------------
Chemicals--0.7%
12,800 Air Products & Chemicals,
Inc........................ 609,600
40,000 Praxair, Inc................. 750,000
------------
1,359,600
------------
Chemical-Specialty--1.8%
58,000 Ferro Corp................... 2,022,750
37,200 IMC Fertilizer Group, Inc.... 1,701,900
------------
3,724,650
------------
Computer & Related Equipment--3.6%
15,000 Compaq Computer Corp.*....... 1,481,250
185,000 EMC Corp..................... 3,584,375
General Instrument
32,500 Corp.*..................... 1,539,688
International Business
5,000 Machines Corp.............. 264,375
7,000 Motorola, Inc................ 732,795
------------
7,602,483
------------
Computer Software & Services--8.1%
50,000 AutoDesk, Inc................ 2,887,500
80,000 BISYS Group, Inc.*........... 1,500,000
Computer Associates
210,000 International, Inc......... 7,717,500
25,000 Informix Corporation......... 587,500
125,000 Oracle Systems Corp.*........ 4,125,000
------------
16,817,500
------------
Consumer Products--2.6%
65,000 Colgate-Palmolive Co......... 4,233,125
Paragon Trade Brands,
35,000 Inc.*...................... 1,168,125
------------
5,401,250
------------
Electronics--1.3%
70,000 Paging Network, Inc.*........ 1,960,000
Reliance Electric
45,000 Co.*....................... 781,875
------------
2,741,875
------------
Exploration & Production--1.1%
20,000 Cabot Corp................... 1,040,000
Potash Corp.
45,000 Saskatchewan, Inc.......... 1,164,375
------------
2,204,375
------------
Financial Services--1.2%
97,000 CTL Credit, Inc.*............ 1,333,750
75,667 Mercury Finance Corp......... 1,153,917
------------
2,487,667
------------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------ ----------- --------
<C> <S> <C>
Food & Beverage--2.1%
30,000 Brothers Gourmet Coffees,
Inc........................ $ 532,500
40,000 Celestial Seasonings,
Inc.*...................... 1,150,000
395,000 RJR Nabisco Hldgs. Corp.*.... 2,715,625
------------
4,398,125
------------
Health Care Services (HMO)--1.9%
15,000 Oxford Health Plans, Inc.*... 967,500
50,000 Ramsay-HMO, Inc.*............ 2,687,500
10,000 Sierra Health Services,
Inc.*...................... 282,500
------------
3,937,500
------------
Home Building & Real Estate--1.6%
40,000 McArthur Glen Realty
Corp....................... 1,110,000
60,000 Southern Energy Homes,
Inc.*...................... 1,035,000
40,000 TJ International, Inc........ 1,090,000
------------
3,235,000
------------
Hotel/Motel--4.2%
30,000 Hilton Hotels Corp........... 2,178,750
72,500 Hospitality Franchise
Systems, Inc.*............. 4,277,500
56,600 Louisiana Quinta Inns,
Inc........................ 2,200,325
------------
8,656,575
------------
Insurance/Annuity--4.5%
95,000 Amvestors Financial Corp.*... 1,021,250
120,000 Equitable of Iowa Companies,
Inc........................ 4,185,000
120,000 SunAmerica, Inc.............. 4,260,000
------------
9,466,250
------------
Leisure--0.5%
15,000 Disney (Walt) Co............. 721,875
10,000 Hollywood Park, Inc.......... 234,375
------------
956,250
------------
Machinery & Equipment--11.1%
13,500 Caterpillar, Inc............. 1,463,063
12,500 Cincinnati Milacron, Inc..... 292,000
24,000 Deere & Co................... 2,025,000
65,000 Flow International Corp.*.... 414,375
88,500 Illinois Tool Works, Inc..... 3,805,500
115,000 Stewart & Stevenson
Services, Inc.............. $ 5,721,250
15,000 Trinity Industries,
Inc........................ 665,625
195,000 Varity Corp.*................ 8,872,500
------------
23,259,313
------------
Medical Supplies--1.3%
70,000 Patterson Dental Co.*........ 2,283,750
20,000 Resound Corp.*............... 375,000
------------
2,658,750
------------
Mineral Resources--0.3%
30,000 Placer Dome, Inc............. 723,750
------------
Office Equipment & Supplies--1.0%
20,000 Singer Co.................... 754,076
30,000 Viking Office Products,
Inc.*...................... 1,402,500
------------
2,156,576
------------
Paper & Forest Products--0.8%
40,000 Louisiana Pacific
Corp....................... 1,720,000
------------
Pharmaceuticals--1.4%
50,000 Ivax Corp.................... 1,756,250
54,000 Syncor International
Corp.*..................... 1,174,500
------------
2,930,750
------------
Railroads--2.9%
30,000 Consolidated Rail
Corp....................... 1,863,750
30,000 CSX Corp..................... 2,640,000
42,700 Illinois Central
Corp....................... 1,526,525
------------
6,030,275
------------
Retail-General Merchandise--0.5%
20,000 Kohls Corp.*................. 1,020,000
------------
Retail-Specialty--3.4%
55,000 Home Depot, Inc.............. 2,289,375
35,000 Tandy Corp................... 1,452,500
40,000 Lowes Companies, Inc......... 2,645,000
55,000 Ultimate Electronics,
Inc.*...................... 605,000
------------
6,991,875
------------
</TABLE>
See Notes to Financial Statements.
B-33
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------ ----------- --------
<C> <S> <C>
Steel--2.1%
205,000 Bethlehem Steel Corp.*....... $ 4,458,750
------------
Telecommunications--4.6%
35,000 British Telecommunications
PLC (ADR) (Great
Britain)................... 2,288,125
25,000 Cable & Wireless Public Ltd.
Co. (ADR) (Great
Britain)................... 531,250
30,000 MCI Communications Corp...... 822,500
15,000 Nextel Communications Inc.... 639,990
135,900 Telefonica de Espana (ADR)
(Spain).................... 5,385,037
------------
9,666,902
------------
Textiles--0.9%
50,000 Phillips Van Heusen Corp..... 1,781,250
------------
Transportation--2.4%
20,000 Kansas City Southern
Industries, Inc............ 902,500
95,000 XTRA Corp.................... 4,203,750
------------
5,106,250
------------
Trucking & Shipping--1.8%
70,000 Airborne Freight Corp........ 2,607,500
70,000 Anangel-Amer. Shipholdings
(ADR) (Cayman Islands)..... 1,251,250
------------
3,858,750
------------
Waste Management--0.6%
15,000 Mid-American Waste Systems,
Inc........................ 142,500
45,000 WMX Technologies, Inc........ 1,108,125
------------
1,250,625
------------
Total long-term investments
(cost $154,924,206)........ 178,792,153
------------
Par Value
(000)
- ---------
SHORT-TERM INVESTMENTS
Commercial Paper--6.1%
Koch Industries
$ 6,800 3.47%, 3/1/94.............. $ 6,800,000
Receivables Capital
Corporation
6,000 3.25%, 3/1/94.............. 6,000,000
------------
Total short-term investments
(cost $12,800,000)......... 12,800,000
------------
Total investments before
short sales--91.8%
(cost $167,724,206; Note
4)......................... 191,592,153
------------
Shares COMMON STOCKS SOLD SHORT--(.3%)
- -------
Commercial Bank
10,000 State Street Bank & Trust
Company.................... (372,500)
International Telecommunications
5,000 HK Telecom*.................. (284,375)
------------
Total investments sold short
(proceeds $656,178)........ (656,875)
------------
Total investments, net of
short sales--91.5%......... 190,935,278
Other assets in excess of
liabilities--8.5%.......... 17,649,282
------------
Net Assets--100%............. $208,584,560
============
</TABLE>
- ------------------
* Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-34
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $167,724,206).............................................. $ 191,592,153
Cash................................................................................... 53,769
Receivable for investments sold........................................................ 23,610,910
Receivable for Fund shares sold........................................................ 1,873,430
Dividends receivable................................................................... 301,352
Other assets........................................................................... 17,389
-----------------
Total assets....................................................................... 217,449,003
-----------------
Liabilities
Payable for investments purchased...................................................... 6,959,959
Investments sold short, at value (proceeds $656,178)................................... 656,875
Payable for Fund shares reacquired..................................................... 565,770
Accrued expenses....................................................................... 422,159
Distribution fee payable............................................................... 158,828
Management fee payable................................................................. 100,852
-----------------
Total liabilities.................................................................. 8,864,443
-----------------
Net Assets............................................................................. $ 208,584,560
=================
Net assets were comprised of:
Common stock, at par................................................................. $ 139,105
Paid-in capital in excess of par..................................................... 176,251,278
-----------------
176,390,383
Accumulated net investment loss...................................................... (745,215)
Accumulated net realized gain on investments......................................... 9,072,142
Net unrealized appreciation on investments........................................... 23,867,250
-----------------
Net assets, February 28, 1994.......................................................... $ 208,584,560
=================
Class A:
Net asset value and redemption price per share
($5,469,467 / 361,879 shares of common stock issued and outstanding)............... $15.11
Maximum sales charge (5.25% of offering price)....................................... .84
-----------------
Maximum offering price to public..................................................... $15.95
=================
Class B:
Net asset value, offering price and redemption price per share
($203,115,093 / 13,548,588 shares of common stock issued and outstanding).......... $14.99
=================
</TABLE>
See Notes to Financial Statements.
B-35
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 28,
1994
-----------
<S> <C>
Net Investment Loss
Income
Dividends (net of foreign
withholding taxes of $61,241)..... $ 3,073,793
Interest............................ 355,411
-----------
Total income...................... 3,429,204
-----------
Expenses
Distribution fee--Class A........... 8,690
Distribution fee--Class B........... 2,180,398
Management fee...................... 1,388,821
Transfer agent's fees and
expenses............................ 550,000
Custodian's fees and expenses....... 189,000
Reports to shareholders............. 100,000
Registration fees................... 88,000
Audit fee........................... 55,000
Directors' fees..................... 48,750
Legal fees.......................... 40,000
Franchise taxes..................... 29,000
Miscellaneous....................... 24,558
-----------
Total expenses.................... 4,702,217
-----------
Net investment loss................... (1,273,013)
-----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions............. 31,254,806
Written options..................... 19,731
Futures transactions................ 25,428
Investments sold short.............. (412,051)
-----------
30,887,914
-----------
Net change in unrealized appreciation on:
Investments......................... (12,403,556)
Investments sold short.............. (697)
-----------
(12,404,253)
-----------
Net gain on investments............... 18,483,661
-----------
Net Increase in Net Assets
Resulting from Operations............. $17,210,648
===========
</TABLE>
PRUDENTIAL GROWTH FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended February 28,
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $ (1,273,013) $ 946,136
Net realized gain on
investments.......... 30,887,914 8,855,184
Net change in
unrealized
appreciation of
investments.......... (12,404,253) (4,195,990)
------------ ------------
Net increase in net
assets resulting from
operations........... 17,210,648 5,605,330
------------ ------------
Net equalization
debits................. (76,178) (162,716)
------------ ------------
Dividends and distributions (Note 1)
Dividends to
shareholders from net
investment income
Class A.............. -- (44,533)
Class B.............. -- (1,113,083)
------------ ------------
-- (1,157,616)
------------ ------------
Distributions to
shareholders from net
realized capital
gains
Class A.............. (488,857) (148,147)
Class B.............. (25,505,673) (7,810,315)
------------ ------------
(25,994,530) (7,958,462)
------------ ------------
Fund share transactions
(Note 5)
Proceeds from shares
sold................. 33,043,389 140,851,772
Net asset value of
shares issued in
reinvestment of
dividends and
distributions........ 24,494,400 8,521,054
Cost of shares
reacquired........... (80,947,271) (185,872,452)
------------ ------------
Net decrease in net
assets from
Fund share
transactions......... (23,409,482) (36,499,626)
------------ ------------
Total decrease........... (32,269,542) (40,173,090)
------------ ------------
Net Assets
Beginning of year........ 240,854,102 281,027,192
------------ ------------
End of year.............. $208,584,560 $240,854,102
============ ============
</TABLE>
See Notes to Financial Statements.
B-36
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
Notes to Financial Statements
Prudential Growth Fund, Inc. (the "Fund"), is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Fund's investment objective is to seek a high total return consistent with
reasonable risk through allocating assets among equity securities, fixed-income
securities and cash based on an evaluation of current market and economic
conditions.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Investments traded on an exchange and NASDAQ National Market
Equity Securities are valued at the last reported sales price on the primary
exchange on which they are traded. Securities traded in the over-the-counter
market (including securities listed on exchanges whose primary market is
believed to be over-the-counter) and listed securities for which no sales were
reported on that date are valued at the mean between the last reported bid and
asked prices. Stock options traded on national securities exchanges are valued
at the closing prices on such exchanges. Securities for which market quotations
are not readily available are valued at fair value as determined in good faith
by, or under the direction of, the Fund's Board of Directors.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Net
investment income/loss (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares of the Fund
based upon the relative proportion of net assets of each class at the beginning
of the day.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin". Subsequent payments, known as "variation margin",
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gains or losses
until the contracts expire or are closed, at which time the gains or losses are
reclassified to realized gain or loss. The Fund invests in financial futures
contracts solely for the purpose of hedging its existing portfolio securities or
securities the Fund intends to purchase against fluctuations in value caused by
changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss. The use of futures transactions
involves the risk of imperfect correlation in movements in the price of futures
contracts, interest rates and the underlying hedged assets. There were no
financial futures contracts outstanding at February 28, 1994.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from the sale of options. The difference between the premium
and the amount paid on effecting a closing purchase transaction, including
brokerage commissions, is also treated as a realized gain, or if the premium is
less than the amount paid for the closing purchase transaction, as a realized
loss. If a call option is exercised, the premium is added to the proceeds from
the sale of the underlying security in determining whether the Fund has realized
a gain or loss. If a put option is exercised, the premium reduces the cost basis
of the securities purchased by the Fund. The Fund, as writer of an option, may
have no control over whether the underlying securities may be sold (call) or
purchased (put) and as a result bears the market risk of an unfavorable change
in the price of the security underlying the written option. There were no
written options outstanding at February 28, 1994.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of
B-37
<PAGE>
the sale. The Fund may have to pay a fee to borrow the particular security and
may be obligated to pay over any payments received on such borrowed securities.
A gain, limited to the price at which the Fund sold the security short, or a
loss, unlimited in magnitude, will be recognized upon the termination of a short
sale if the market price at termination is less than or greater than,
respectively, the proceeds originally received.
Equalization: The Fund follows the accounting practice known as equalization, by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income, if any, semi-annually and make distributions at least annually of any
net capital gains. 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.
Reclassification of Capital Accounts: Effective March 1, 1993, the Fund began
accounting and reporting for distributions to shareholders in accordance with
Statement of Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies. As a result of this statement, the Fund changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions determined in
accordance with income tax regulations. The effect caused by adopting this
statement was to increase paid-in capital by $1,672,698, decrease undistributed
net investment income by $1,652,300, and decrease accumulated net realized gains
by $20,398 compared to amounts previously reported through February 28, 1993.
During the year ended February 28, 1994, the Fund reclassified $1,273,013 of net
operating losses to accumulated net realized gains; there was no net effect on
paid in capital. Net investment income, net realized gains, and net assets were
not effected by this change.
Federal Income 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 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 rates.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
("PMF"). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has a subadvisory agreement with Greg A. Smith Asset Management Corporation
("GSAM"); GSAM furnishes investment advisory services to PMF in connection with
the management of the Fund. PMF pays for the subadviser's services, 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 to PMF is computed daily and payable monthly, at an
annual rate of .625 of 1% of the Fund's average daily net assets up to $500
million, .55 of 1% of the next $500 million of average daily net assets and .50
of 1% of such assets in excess of $1 billion. Pursuant to the subadvisory
agreement, PMF compensates the subadviser for its services in connection with
the management of the Fund at an annual rate of .375 of 1% of the Fund's average
daily net assets up to $500 million, .35 of 1% of the next $500 million of
average daily net assets and .30 of 1% of such average daily net assets in
excess of $1 billion. During the year ended February 28, 1994, PMF earned
$1,388,821 in management fees of which it paid $833,292 to GSAM under the
foregoing agreements.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), who acts as the distributor of the Class A shares
of the Fund, and Prudential Securities Incorporated ("PSI") who acts as
distributor of the Class B shares of the Fund (collectively the "Distributors").
To reimburse the Distributors for their expenses incurred in distributing and
servicing the Fund's Class A and B shares, the Fund, pursuant to plans of
distribution, pays the Distributors a reimbursement, accrued daily and payable
monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses
with respect to Class A shares at an annual rate of up to .30 of 1% of the
average daily net assets of the Class A shares. Such expenses under the Class A
Plan were .20 of 1% of the average daily net assets of the Class A shares for
the ten months ended December 31, 1993. Effective January 1, 1994, the Class A
plan distribution expenses were increased to .25 of 1% of the average daily net
assets. PMFD pays various broker-dealers, including PSI and Pruco Securities
Corporation ("Prusec"), affiliated broker-dealers,
B-38
<PAGE>
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees
incurred through the receipt of reimbursement payments from the Fund under the
plans, and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $44,200 in
front-end sales charges resulting from sales of Class A shares during the year
ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI & Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Fund
pursuant to the Class B Plan. PSI advised the Fund that for the year ended
February 28, 1994 it received approximately $249,900 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Fund that at February 28, 1994, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges approximated $757,900. This
amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the
Fund would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI and PMF are indirect
wholly-owned subsidiaries of The Prudential Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Ser- vices, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. For the year ended February 28, 1994,
the Fund incurred fees of approximately $432,000 for the services of PMFS. As of
February 28, 1994, approximately $33,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also include certain
out-of-pocket expenses paid to non-affiliates.
For the year ended February 28, 1994, PSI earned approximately $31,000 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of invest- ment securities, other than short-term
investments, for the year ended February 28, 1994 were $374,397,446 and
$443,312,321, respectively.
The federal income tax basis of the Fund's investments at February 28, 1994
was $167,806,047, and accordingly, net unrealized appreciation for federal
income tax purposes was $23,786,106 (gross unrealized appreciation--
$27,201,876; gross unrealized depreciation--$3,415,770).
Transactions in options written during the year ended February 28, 1994,
were as follows:
Number of Premiums
Contracts Received
--------- --------
Options written....................... 500 $185,494
Options terminated in closing purchase
transactions........................ (410) (152,105)
Options expired....................... (90) (33,389)
--------- --------
Options outstanding at February 28,
1994................................ -0- -0-
========= ========
NOTE 5. CAPITAL
Class A shares are sold with a front-end sales charge of up to 5.25%. 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. Both classes of
shares have equal rights as to earnings, assets and voting privileges except
that each class bears different distribution expenses and has exclusive voting
rights with respect to its distribution plan.
There are 500 million shares of common stock, $.01 par value per share,
divided into two classes, designated Class A and Class B common stock, each of
which consists of 250 million authorized shares.
B-39
<PAGE>
Transactions in shares of common stock were as follows:
Shares Amount
----------- -------------
Class A
Year ended February 28, 1994:
Shares sold................. 574,337 $ 9,064,280
Shares issued in
reinvestment of
distributions............. 31,195 464,547
Shares reacquired........... (514,635) (8,182,012)
----------- -------------
Net increase in shares
outstanding............... 90,897 $ 1,346,815
=========== =============
Class A
Year ended February 28,
1993:
Shares sold................. 808,694 $ 12,148,432
Shares issued in
reinvestment of dividends
and distributions......... 12,430 186,216
Shares reacquired........... (878,566) (13,201,021)
----------- -------------
Net decrease in shares
outstanding............... (57,442) $ (866,373)
=========== =============
Shares Amount
----------- -------------
Class B
Year ended February 28, 1994:
Shares sold................. 1,528,319 $ 23,979,109
Shares issued in
reinvestment of
distributions............. 1,620,447 24,029,853
Shares reacquired........... (4,630,005) (72,765,259)
----------- -------------
Net decrease in shares
outstanding............... (1,481,239) $ (24,756,297)
=========== =============
Class B
Year ended February 28, 1993:
Shares sold................. 8,684,206 $ 128,703,340
Shares issued in
reinvestment of dividends
and distributions......... 558,437 8,334,838
Shares reacquired........... (11,603,701) (172,671,431)
----------- -------------
Net decrease in shares
outstanding............... (2,361,058) $ (35,633,253)
=========== =============
B-40
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------- ------------------------------------------------------
January 22,
1990+
Year Ended February 28/29, through Year Ended February 28/29,
------------------------------------- February 28, ------------------------------------------------------
1994 1993 1992** 1991 1990 1994 1993 1992** 1991 1990
---------- ------ ------ ------ ------------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period......... $15.74 $15.84 $14.91 $14.47 $ 14.45 $ 15.74 $ 15.86 $ 14.92 $ 14.46 $ 13.40
---------- ------ ------ ------ ------ --------- -------- -------- -------- --------
Income from investment
operations
Net investment
income
(loss)......... .03 .19 .21 .27 .01 (.09) .06 .11 .17 .26
Net realized and
unrealized gain
on investment
transactions... 1.29 .37 1.75 .64 .01 1.29 .37 1.73 .65 1.21
---------- ------ ------ ------ ------ ---------- -------- -------- -------- --------
Total from
investment
operations... 1.32 .56 1.96 .91 .02 1.20 .43 1.84 .82 1.47
---------- ------ ------ ------ ------ ---------- -------- -------- -------- --------
Less distributions
Dividends from
net investment
income......... -- (.18) (.29) (.26) -- -- (.07) (.16) (.16) (.41)
Distributions
from net
realized
gains.......... (1.95) (.48) (.74) (.21) -- (1.95) (.48) (.74) (.20) --
---------- ------ ------ ------ ------ --------- -------- -------- -------- --------
Total
distributions... (1.95) (.66) (1.03) (.47) -- (1.95) (.55) (.90) (.36) (.41)
---------- ------ ------ ------ ------ ---------- -------- -------- -------- --------
Net asset value,
end of
period......... $15.11 $15.74 $15.84 $14.91 $ 14.47 $ 14.99 $ 15.74 $ 15.86 $ 14.92 $ 14.46
========== ====== ====== ====== ====== ========== ======== ======== ======== ========
TOTAL RETURN#.... 8.81% 3.74% 13.76% 6.74% .14% 8.02% 2.91% 12.80% 6.03% 10.90%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period
(000).......... $5,469 $4,264 $5,202 $1,105 $ 147 $ 203,115 $236,590 $275,826 $277,282 $327,406
Average net
assets (000)... $4,172 $4,177 $2,126 $ 705 $ 41 $ 218,040 $246,195 $270,211 $291,028 $359,942
Ratios to average
net assets:
Expenses,
including
distribution
fees......... 1.34% 1.29% 1.35% 1.46% 1.49%* 2.13% 2.09% 2.15% 2.26% 1.70%
Expenses,
excluding
distribution
fees......... 1.13% 1.09% 1.15% 1.26% 1.29%* 1.13% 1.09% 1.15% 1.26% 0.97%
Net investment
income
(loss)....... .20% 1.13% 1.37% 1.94% 3.39%* (.59)% 0.37% 0.74% 1.14% 1.71%
Portfolio
turnover....... 178% 99% 146% 77% 76% 178% 99% 146% 77% 76%
</TABLE>
- ---------------
* Annualized.
** Calculated based upon weighted average shares outstanding during the year.
+ Commencement of offering of Class A shares.
# 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 one full year are
not annualized.
See Notes to Financial Statements.
B-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Prudential Growth 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 Growth Fund, Inc. (the
"Fund") at February 28, 1994, 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 five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1994 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York
April 7, 1994
B-42
