As filed with the Securities and Exchange Commission on June 28, 1994
Registration No. 2-82764
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 15 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 16 [X]
(Check appropriate box or boxes)
PRUDENTIAL GROWTH FUND, INC.
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 214-1250
S. Jane Rose, Esq.
One Seaport Plaza
New York, New York 10292
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (a), of Rule 485.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940,
Registrant has previously registered an indefinite number of shares of
beneficial interest, par value $.01 per share. The Registrant filed a
notice under such Rule for its fiscal year ended February 28, 1994 on
April 29, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 495)
<TABLE>
<CAPTION>
N-1a Item No. Location
- ------------- --------
Part A
<S> <C><C> <C>
Item 1. Cover Page ....................................................... Cover Page
Item 2. Synopsis ......................................................... Fund Expenses
Item 3. Condensed Financial Information .................................. Fund Expenses; Financial Highlights;
How the Fund Calculates Performance
Item 4. General Description of Registrant ................................ Cover Page; Fund Highlights; How the
Fund Invests; General Information
Item 5. Management of Fund ............................................... Financial Highlights; How the Fund is
Managed
Item 6. Capital Stock and Other Securities ............................... Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered ............................. Shareholder Guide; How the Fund
Values its Shares
Item 8. Redemption or Repurchase ......................................... Shareholder Guide; How the Fund
Values its Shares; General Information
Item 9. Pending Legal Proceedings ........................................ Not Applicable
Part B
Item 10. Cover Page ....................................................... Cover Page
Item 11. Table of Contents ................................................ Table of Contents
Item 12. General Information and History .................................. General Information
Item 13. Investment Objective and Policies ................................ Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund ........................................... Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of Securities .............. Not Applicable
Item 16. Investment Advisory and Other Services ........................... Manager; Distributor; Custodian,
Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Practices ......................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities ............................... Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered ..... Purchase and Redemption of Fund
Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status ....................................................... Taxes, Dividends and Distributions
Item 21. Underwriters ..................................................... Distributor
Item 22. Calculation of Performance Data .................................. Performance Information
Item 23. Financial Statements ............................................. Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
Prudential Growth Fund, Inc.
- --------------------------------------------------------------------------------
Prospectus dated June 28, 1994
- --------------------------------------------------------------------------------
Prudential Growth Fund, Inc. (the Fund), formerly Prudential-Bache
Research 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 65% 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.
The Board of Directors of the Fund has approved certain changes to the
Fund's Articles of Incorporation, including a provision providing for the
conversion of Class B shares to Class A shares after a specified period,
and certain modifications to the Fund's Distribution Agreements and Plans
of Distribution. These changes will be presented to Shareholders at an
upcoming meeting and if approved would become effective upon the offering
of a new class of shares of the Fund, to be designated Class C shares,
which is expected to commence shortly. See "General Information--Additional
Information."
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Additional
information about the Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information, dated June 28, 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.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
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.
<PAGE>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
The Board of Directors of the Fund has approved certain changes to the
Fund's Articles of Incorporation, including a provision providing for the
conversion of Class B shares to Class A shares after a specified period,
and certain modifications to the Fund's Distribution Agreements and Plans
of Distribution. These changes will be presented to shareholders at an
upcoming meeting and if approved would become effective upon the offering
of a new class of shares of the Fund, to be designated Class C shares,
which is expected to commence shortly. See "General Information--Additional
Information."
- --------------------------------------------------------------------------------
What is Prudential Growth Fund, Inc.?
Prudential Growth 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. See "How the
Fund Invests--Investment Objective and Policies" at page 7.
What Are the Fund's Special Characteristics and Risks?
In seeking to achieve its investment objective, the Fund may 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. See "How the Fund Invests--Investment Objective and Policies" at page
7.
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 May 31, 1994, PMF
served as manager or administrator to 66 investment companies, including
37 mutual funds, with aggregate assets of approximately $48 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 currently reimbursed for
its services at an annual rate of up to .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 shares and is reimbursed for its
services at an annual rate of up to 1% of the average daily net assets of
the Class B shares. See "How the Fund is Managed--Distributor" at page 12.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
What is the Minimum Investment?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. 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 24.
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 shares). See "How the Fund Values its Shares" at page 14 and
"Shareholder Guide--How to Buy Shares of the Fund" at page 18.
What Are My Purchase Alternatives?
The Fund offers two classes of shares:
*Class A Shares: Sold with an initial sales charge of up to 5.25% 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.
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 shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
20.
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 16.
- --------------------------------------------------------------------------------
3
<PAGE>
FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------- --------------
<S> <C> <C>
Shareholder Transaction Expenses\D
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 5.25% None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends None None
Deferred Sales Load (as a percentage of original
purchase price or redemption
proceeds, whichever is lower) None 5% during the first year,
decreasing by 1% annually
to 1% in the fifth and sixth
years and 0% the seventh
year*
Redemption Fees None None
Exchange Fee None None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets) Class A Shares Class B Shares
-------------- --------------
<S> <C> <C>
Management Fees .625% .625%
12b-1 Fees\D .250%\D\D 1.000%
Other Expenses .505% .505%
----- -----
Total Fund Operating Expenses 1.380% 2.130%
===== =====
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 Year 3 Years 5 Years 10 Years
- ------- ------ ------- ------- --------
You would pay the following expenses on a $1,000
investment, assuming (1) 5.25% annual return and (2) redemption
at the end of each time period
Class A $66 $94 $124 $210
Class B $72 $97 $124 $246
You would pay the following expenses on the same investment,
assuming no redemption
Class A $66 $94 $124 $210
Class B $22 $67 $114 $246
</TABLE>
The above example is based on restated data for the Fund's
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 and transfer
agency and custodian fees.
\D 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 Class B 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."
\D\D 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.
See "How the Fund is Managed--Distributor."
4
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class A Shares)
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Class A
-----------------------------------------
January 22,
1990*
through
Year ended February 28/29, February 28,
-----------------------------
1994 1993 1992\D 1991 1990
---- ---- ---- ---- ----
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:\D\D 8.81% 3.74% 13.76% 6.74% .14%
RATIOS/SUPPLEMENTAL 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%
* Commencement of offering of Class A shares.
** Annualized.
\D Calculated based upon weighted average shares outstanding during the
year.
\D\D 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.
- -------------------------------------------------------------------------------
5
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class B Shares)
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------------------------
Year ended February 28/29
------------------------------------------------------------------------------------
1994 1993 1992\D 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\D\D .... .................... 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:\D\D\D
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 ............... 1.78% 99% 146% 77% 76% 64% 93% 109% 216% 233%
<FN>
- --------------
* On January 22, 1990, Prudential Mutual Fund Management, Inc. succeeded Prudential Securities Incorporated as the manager
of the Fund. See "Manager" in the Statement of Additional Information.
\D Calculated based upon weighted average shares outstanding during the year.
\D\D 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.
\D\D\D 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."
</TABLE>
- -------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
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 65% 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 Corporation (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. 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
<PAGE>
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 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
8
<PAGE>
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
9
<PAGE>
investment company. See "Investment Objective and Policies--Futures
Contracts," and "--Options on Futures Contracts" and "--Currency Futures and
Options Thereon" and "Dividends, Distributions and Taxes" in the Statement
of Additional Information.
Special 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,
10
<PAGE>
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 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, 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>
- --------------------------------------------------------------------------------
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".
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 May 31, 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 $48 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.
12
<PAGE>
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
shares of the Fund. It is an indirect, wholly-owned subsidiary of
Prudential.
Under separate Distribution and Service Plans (the Class A Plan and the
Class B 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 and
Class B shares, respectively. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and Pruco Securities Corporation (Prusec), an
affiliated broker-dealer, commissions 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, interest and/or carrying charges (Class B only) 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.
The Board of Directors of the Fund has approved amendments to the Plans
that would, among other things, change the Plans from reimbursement-type
plans to compensation-type plans. The Fund expects to present the amended
plans to shareholders for their approval shortly. See "General Information
- --Additional Information."
Under the Class A Plan, the Fund reimburses PMFD for its distribution-
related expenses with respect to Class A shares at an annual rate of up to
.30 of 1% of the average daily net assets of the Class A shares. The Class
A Plan provides that (i) up to .25 of 1% of the average daily net assets of
the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of up to .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. Unlike the Class B Plan, there are no carry forward
amounts under the Class A Plan, and interest expenses are not incurred
under the Class A Plan. PMFD has advised the Fund that distribution
expenses under the Class A Plan will not exceed .25 of 1% of the average
daily net asset value 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 as reimbursement of expenses related to the
distribution of Class A shares. This amount was primarily expended for
payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended February 28, 1994, PMFD
also received approximately $44,200 in initial sales charges.
Under the Class B Plan, the Fund reimburses Prudential Securities for
its distribution-related expenses with respect to Class B shares
(asset-based sales charges) at an annual rate of up to .75 of 1% of the
average daily net assets of the Class B shares. Prudential Securities
recovers the distribution expenses it incurs through the receipt of
reimbursement payments from the Fund under the Class B Plan and the receipt
of 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 received $249,900 in contingent deferred sales charges.
The Class B Plan also provides for the payment of a service fee to
Prudential Securities at a rate not to exceed .25 of 1% of the average daily
net asset value of the Class B shares. The service fee is used to pay for
personal service and/or the maintenance of shareholder accounts.
Actual distribution expenses (asset-based sales charges) for Class B
shares for any given year may exceed the fees received pursuant to the
Class B Plan and will be carried forward and paid by the Fund in future
years so long as the Class B Plan is in effect. Interest is accrued monthly
on such carry forward amounts at a rate comparable to that paid by
Prudential Securities for bank borrowings. See "Distributor" in the
Statement of Additional Information.
The aggregate distribution fee for Class B shares (asset-based sales
charges plus service fees) will not exceed the annual rate of 1% of the
average daily net assets of the Class B shares under the Class B Plan.
13
<PAGE>
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.
For the fiscal year ended February 28, 1994, Prudential Securities
received $2,180,398 from the Fund under the Class B Plan. It is estimated
that Prudential Securities spent approximately $1,037,200 on behalf of the
Class B shares of the Fund during such period. At February 28, 1994, the
aggregate amount of distribution expenses incurred by Prudential Securities
since the inception of the Fund and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges was approximately
$757,900 or 0.4% of the net assets of the Class B shares. This unreimbursed
amount may be recovered by Prudential Securities through future payments
under the Class B Plan or contingent deferred sales charges.
The distribution fee and initial sales charge in the case of Class A
shares will not be used to subsidize the sale of Class B shares.
Similarly, the distribution fee and contingent deferred sales charge in
the case of Class B shares will not be used to subsidize the sale of Class
A shares.
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.
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 and Class B Plans, the Manager (or one of its affiliates) may make
payments 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.
The Board of Directors have approved certain modifications to the
Plans. See "General Information--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.
14
<PAGE>
- --------------------------------------------------------------------------------
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.
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 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 shares are subject. It is expected, however, that the NAV of
the two 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 between the classes.
- --------------------------------------------------------------------------------
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 and Class B 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."
15
<PAGE>
- --------------------------------------------------------------------------------
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 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.
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 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
16
<PAGE>
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 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. Each class
of common stock represents an interest in the same assets of the Fund and
is identical in all respects except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution and service plan. 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
two classes, designated as Class A and Class B shares. In accordance with
the Fund's Articles of Incorporation, the Board of Directors has authorized
and may again 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. See
"Additional Information" below.
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 Class A and
Class B 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. 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 shares generally bear higher distribution expenses than
Class A shares, the liquidation proceeds to Class B shareholders 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
The Board of Directors of the Fund has approved amendments to the
Fund's Articles of Incorporation to provide (i) for the conversion of Class
B shares to Class A shares approximately seven years after purchase, and
(ii) to change the name of the Fund to Prudential Strategist Fund, Inc. In
addition, the Board of Directors has approved modifications to the Fund's
Plans to make them compensation rather than reimbursement plans. Once
modified, the Plans would provide that the Fund would be required to pay
distribution and/or service fees to the Distributor as compensation for its
distribution activities, not as reimbursement for specific expenses
incurred. Under the new Plans, if the Distributor's expenses were to exceed
its distribution and service fee, the Fund would not be obligated to pay
any additional expenses. Conversely, if the Distributor's expenses were
less than its distribution and service fee, it would retain its full fees
and realize a profit. These modifications will be presented to shareholders
at an upcoming meeting and if approved would become effective upon the
offerings of a new class of shares of the Fund, to be designated Class C
shares, which is
17
<PAGE>
expected to commence shortly. It is currently expected that Class C shares
will be offered without an initial sales charge and would be subject to a
CDSC of 1% for redemptions made within one year of purchase. There can be
no assurance that Class C shares will be offered (or that they will be
offered on the terms described above) or that the changes to the Plans will
be implemented.
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 is $1,000. The minimum subsequent investment
is $100. 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.
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 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) 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 Growth
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
or Class B 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
Growth Fund, Inc., Class A or Class B 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.
18
<PAGE>
ALTERNATIVE PURCHASE PLAN
The Fund offers two classes of 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).
Class A shares are subject to an initial sales charge of up to 5.25% of
the amount invested and an annual distribution fee which is currently being
charged at a rate of up to .25 of 1% of the average daily net assets of the
Class A shares. Certain purchases of Class A shares may qualify for
reduction or waiver of initial sales charges. See "Initial Sales Charge
Alternative--Class A Shares--Reduction and Waiver of Initial Sales Charges"
below.
Class B shares do not incur a sales charge when they are purchased but
are subject to a contingent deferred sales charge (declining from 5% to
zero of the lesser of the amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within six years of purchase
and an annual distribution fee of up to 1% of the average daily net assets
of the Class B shares. Certain redemptions of Class B shares may qualify
for waiver or reduction of the contingent deferred sales charge. See "How
to Sell Your Shares--Waiver of the Contingent Deferred Sales Charges" and
"How to Sell Your Shares--Contingent Deferred Sales Charge--Class B
Shares--Quantity Discount" below.
The two classes of shares represent an interest in the same portfolio
of investments of the Fund and have the same rights, except that each class
bears the separate expenses of its Rule 12b-1 distribution and service plan
and has exclusive voting rights with respect to its plan. The two 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 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 and Class B shares.
The following illustrations are provided to assist you in determining
which method of purchase best suits your individual circumstances:
If you qualify for a reduced sales charge, you might elect the initial
sales charge alternative because a similar sales charge reduction is not
available for purchases under the deferred sales charge alternative.
However, because the initial sales charge is deducted at the time of
purchase, you would not have all of your money invested initially.
If you do not qualify for a reduced initial sales charge and expect to
maintain your investment in the Fund for a long period of time, you might
also elect the initial sales charge alternative because over time the
accumulated continuing distribution charges of Class B shares will exceed
the initial sales charge plus distribution fees of Class A. Again, however,
you must weigh this consideration against the fact that not all of your
money will be invested initially. Furthermore, the ongoing distribution
charges under the deferred sales charge alternative will be offset to the
extent any return is realized on the additional funds. However, there can
be no assurance that any return will be realized on the additional funds.
On the other hand, you might determine that it is more advantageous to
have all of your money invested initially, although it is subject to a
distribution fee of up to 1% and, for a six-year period, a contingent
deferred sales charge of up to 5%. For example, based on current fees and
expenses, if you purchase Class A shares you would have to hold your
investment for more than 7 years for the 1% Class B distribution fee to
exceed the initial sales charge plus distribution fee of Class A shares. In
this example, if you intend to maintain your investment in the Fund for
more than 7 years, you should consider purchasing Class A shares. However,
this example does not take into account the time value of money which
further reduces the impact of the 1% distribution fee on the investment,
fluctuations in net asset value, the effect of the return on the investment
over this period of time or redemptions while the contingent deferred sales
charge is applicable.
19
<PAGE>
Initial Sales Charge Alternative--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:
Sales Charge as Sales Charge as Dealer Concession
Amount of Percentage of Percentage of as Percentage of
Purchase Offering Price Amount Invested Offering Price
- ---------------- --------------- --------------- -----------------
Less than $25,000 5.25% 5.54% 5.00%
$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 3.50% 3.63% 3.25%
$250,000 to $499,999 3.00% 3.09% 2.90%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1,000,000 to $2,499,999 1.00% 1.01% 0.95%
$2,500,000 and above 0.50% 0.50% 0.45%
Selling dealers may be deemed to be underwriters, as that term is
defined in the Securities Act of 1933.
Reduction and Waiver of Initial Sales Charges. Sales charges are
reduced under Rights of Accumulation and Letters of Intent. Class A shares
are offered at NAV to participants in certain retirement and deferred
compensation plans, including qualified or non-qualified plans under the
Internal Revenue Code and certain affinity group and group savings plans,
provided that the plan has existing assets of at least $10 million or 2,500
eligible employees or members. Additional information concerning the
reduction and waiver of initial sales charges is set forth in the Statement
of Additional Information. In the case of pension, profit-sharing or stock
bonus plans 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) whose accounts are held directly with
the Transfer Agent and for which the Transfer Agent 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 are offered at NAV to participants who are repaying loans
made from such plans to the participant.
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 Prudential Mutual
Fund Services, Inc., the Fund's transfer agent, provides recordkeeping
services, 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 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.
Class A shares are offered at NAV to Directors and officers of the Fund
and other Prudential Mutual Funds, to employees of Prudential Securities
and PMF and their subsidiaries and to members of the families of such
persons who maintain an "employee related" account at Prudential Securities
or the Transfer Agent. Class A shares are offered at NAV to employees
and special agents of Prudential and its subsidiaries and to all persons who
have retired directly from active service with Prudential or one of its
subsidiaries.
Class A shares are offered at NAV to an investor who has 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 investment company sponsored by the
financial adviser's previous employer (other than a money market fund or
other no-load 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 purchase.
20
<PAGE>
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.
Deferred Sales Charge Alternative--Class B Shares
The offering price of Class B shares for investors choosing the
deferred sales charge alternative 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 shares may be subject to a CDSC. See "How to Sell
Your Shares--Contingent Deferred Sales Charge--Class B Shares."
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 Charge--Class B Shares" 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. 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 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
21
<PAGE>
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 than $500 due to a redemption.
The Fund will give such shareholders 60 days' prior written notice in which
to purchase sufficient additional shares to avoid such redemption. No
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 your 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 Charge--Class B Shares
If you have elected to purchase shares without an initial sales charge
(Class B), a contingent deferred sales charge or CDSC (declining from 5% to
zero) will be imposed at the time of redemption. 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 shares to an amount which is lower than the amount of all
payments by you for shares during the preceding six years. 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" 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 have been made on the last
day of the month.
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 and thereafter .. None
22
<PAGE>
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. 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.
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)(7) custodial account. These distributions include a
lump-sum or other distribution after retirement, or for an IRA or Section
403(b)(7) custodial account, after attaining age 59-1/2, 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. In the case of Direct Account and PSI or
Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts
used to repay a loan from such plans on which a CDSC was not previously
deducted will thereafter be subject to a CDSC without regard to the time
such amounts were previously invested. In the case of a 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and
from which a CDSC was previously deducted.
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. The waiver will be granted subject to
confirmation of your entitlement.
Quantity Discount. The CDSC is reduced on redemptions of Class B shares
of the Fund 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
exceeds $500,000. For example, if you purchase $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 is $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 exceeds $500,000
or $1 million:
23
<PAGE>
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 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 waiver of the CDSC. The waiver will be granted subject to
confirmation of your entitlement.
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.
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 and Class B shares of the Fund may be exchanged for Class A
and Class B shares, respectively, of another fund on the basis of the
relative NAV. 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 shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund. 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.
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.
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:
24
<PAGE>
*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 registered 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 shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charge--Class B Shares" above.
*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.
25
<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 registered
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
Prudential Government Plus Fund
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund
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 Global Fund, Inc.
Prudential Global Genesis Fund
Prudential Global Natural Resources Fund
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 Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Flexi Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Growth Fund, Inc.
Prudential Growth Opportunity Fund
Prudential IncomeVertible\R Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund
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
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............................ 18
How to Buy Shares of the Fund.............. 18
Alternative Purchase Plan.................. 18
How to Sell Your Shares.................... 21
How to Exchange Your Shares................ 24
Shareholder Services......................... 24
THE PRUDENTIAL MUTUAL FUND FAMILY............A-1
________________________________________________
MF129A 44405HH
________________________________________________
Class A: 743943 10 2
CUSIP Nos.:
Class B: 743943 20 1
________________________________________________
Prudential
Growth
Fund, Inc.
Prudential Mutual Funds (LOGO)
Building Your Future
On Our StrengthSM
PROSPECTUS
June , 1994
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
Statement of Additional Information
June 28, 1994
Prudential Growth Fund, Inc., formerly Prudential-Bache Research 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 65% 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. 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 June 28, 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 18
Shareholder Investment Account .......................... B-23 24
Net Asset Value ......................................... B-26 14
Performance Information ................................. B-27 15
Taxes, Dividends and Distributions ...................... B-28 15
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants ................................. B-29 14
Financial Statements .................................... B-31 --
Report of Independent Accountants ....................... B-41 --
- -------------------------------------------------------------------------------
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 the Prudential Growth Fund, Inc. The Board of Directors has approved
certain changes to the Fund's Articles of Incorporation to (i) provide a
conversion feature for the Class B shares of the Fund, and (ii) approve a
change in the name of the Fund to Prudential Strategist Fund, Inc. The
Board of Directors has also approved certain changes to the Fund's Plans of
Distribution. These changes will be presented to shareholders at an
upcoming meeting and, if approved, would be implemented in connection with
the offering of a new class of shares, Class C shares, which is expected
shortly. See "General Information--Additional Information" in the
Prospectus.
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. 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 Corporation (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.
B-3
<PAGE>
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
B-4
<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
B-5
<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.
B-6
<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.
B-7
<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
B-8
<PAGE>
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-
B-9
<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
B-10
<PAGE>
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.
B-11
<PAGE>
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
B-12
<PAGE>
the Fund had hedged against the possibility 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 has adopted the following nonfundamental investment policy
which may be changed by the vote of the Board of Directors:
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 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.
The staff of the Securities and Exchange Commission has taken the
position that purchased OTC options and the assets used as "cover" for
written OTC options are illiquid securities. However, the Fund may treat
the securities it uses as cover for written OTC options as liquid provided
it follows a specified procedure. The Fund may sell OTC options only to
qualified dealers who agree
B-13
<PAGE>
that the Fund may repurchase any OTC options it writes for a maximum price
to be calculated by a predetermined formula. In such cases, the OTC option
would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the
option.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the Securities
Act), securities which are not otherwise readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which
have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly from
the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because
of the potential for delays on resale and uncertainty in valuation.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices
and might thereby experience difficulty satisfying redemptions within seven
days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities 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.
The SEC has adopted Rule 144A which 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 Subadviser anticipates
that the market for certain restricted securities, such as foreign
convertible securities, will expand further as a result of this new
regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Subadviser will monitor the liquidity of restricted securities in
the Fund's portfolio under the supervision of the Board of Directors. In
reaching liquidity decisions, the Subadviser 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).
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
shares represented at a meeting at which more than 50% of the outstanding
shares are present in person or represented by proxy or (ii) more than 50%
of the outstanding 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 Director Vice Chairman of Prudential Mutual Fund Management, Inc.
One Seaport Plaza (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 Member
New York, New York 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.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name and Address Fund During Past 5 Years
- ---------------- ------------- ---------------------
<S> <C> <C>
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 Principal Senior Vice President of PMF; Senior Vice President
One Seaport Plaza Financial and (since January 1992) and Vice President (January
New York, New York Accounting Officer 1986-December 1991) of Prudential Securities.
Deborah A. Docs Assistant Secretary Vice President and Associate General Counsel (since January
One Seaport Plaza 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.
</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 or PMF 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 May 31, 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 60% of the
outstanding Class A shares) and 6,622,449 Class B shares (or 49% of the
outstanding Class B shares) of the Fund. In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding
of, proxy materials to the beneficial owners for which it is the record
holder.
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 May 31, 1994, PMF managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $48 billion and, according to the Investment
Company Institute as of December 31, 1993, 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 all 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 interested persons of the
Fund and who have no direct or indirect financial interest in the
Subadvisory Agreement, 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 shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan
and the Class B 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 and Class B shares, respectively. 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, 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.
Class A Plan. For the fiscal year ended February 28, 1994, PMFD
received payments of $8,690 under the Class A Plan as reimbursement of
expenses related to the distribution of Class A shares. This amount was
primarily expended for payment of account servicing fees to financial
advisers and other persons who sell Class A shares. For the fiscal year
ended 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 (1.0%) was
spent on printing and mailing of prospectuses to other than current
shareholders; $49,900 (4.8%) on interest and/or carrying costs; $138,800
(13.4%) on compensation to Pruco Securities Corporation, an affiliated
broker-dealer, for commissions to its financial advisers 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 (80.8%) on the aggregate of (i) payments of
commissions and account servicing fees to financial advisers ($513,700 or
49.5%) and (ii) an allocation on account of overhead and other branch office
distribution-related expenses ($324,200 or 31.3%). 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-Class B shares" in the Prospectus. For the fiscal year ended
February 28, 1994, Prudential Securities received approximately $249,900
in contingent deferred sales charges.
The Class A and Class B 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 and all material amendments are
required to be approved by the Board of Directors in the manner described
above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf
of each class of shares of the Fund by the Distributor. The report 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.
B-20
<PAGE>
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. In the case of Class B 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 Directors
who are not "interested" 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.
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.
B-21
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 28, 1994 February 28, 1993 February 29, 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 at the time of purchase
(Class A shares), or on a deferred basis (Class B 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 each class
bears the separate expenses of its Rule 12b-1 distribution and service plan
and each class has exclusive voting rights with respect to its plan. 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 5.25% and Class B* 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:
<TABLE>
<S> <C>
Class A
Net asset value and redemption price per Class A share .................... $15.11
------
Maximum sales charge (5.25% of offering price) ............................ .84
------
Offering price to public .................................................. $15.95
======
Class B
Net asset value, offering price and redemption price per Class B share* ... $14.99
======
<FN>
--------------
*Class B shares are subject to a contingent deferred sales charge on
certain redemptions. See "Shareholder Guide-How to Sell Your Shares-
Contingent Deferred Sales Charge-Class B Shares" in the Prospectus.
</TABLE>
Reduction and Waiver of Initial Sales Charges-Class A Shares
Retirement and Group Plans. Class A shares are offered at net asset
value to participants in certain retirement, deferred compensation,
affinity group and group savings plans, provided the plan has existing
assets of at least $10 million or 2,500 eligible employees or members. The
term "existing assets" includes transferable cash, shares of Prudential
Mutual Funds held at the Transfer Agent and GICs maturing within three
years. The retirement and group plans eligible for this waiver of the
initial sales charge include, but are not limited to, pension, profit-
sharing or stock bonus plans qualified or non-qualified within the meaning
of Section 401 of the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code), deferred compensation and annuity plans within the
meaning of Sections 403(b)(7) and 457 of the Internal Revenue Code, certain
affinity group plans such as plans of credit unions and trade associations
and certain group savings plans.
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-How to Buy Shares of the Fund" 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;
B-22
<PAGE>
(c) the individual's and spouses' 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.
Rights of Accumulation. Reduced sales charges are also available
through Rights of Accumulation, under which an investor or an eligible
group of related investors, as described above under "Combined Purchase and
Cumulative Purchase Privilege," may aggregate the value of their existing
holdings of shares of the Fund and shares of other Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the
exchange privilege) to determine the reduced sales charge. However, the value
of shares held directly with the Transfer Agent and through Prudential
Securities will not be aggregated to determine the reduced sales charge.
All shares must be held either directly with the Transfer Agent or through
Prudential Securities. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum
offering price (net asset value plus maximum sales charge) as of the
previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that
the investor is entitled to a reduced sales charge. The reduced sales
charges will be granted subject to confirmation of the investor's holdings.
Rights of Accumulation are not available to individual participants in any
retirement or group plans.
Letters of Intent. Reduced sales charges are available to investors (or
an eligible group of related investors) 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 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.
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.
Whenever a transaction takes place in the Shareholder Investment Account,
the shareholder
B-23
<PAGE>
will be mailed a statement showing the transaction and the
status of the Account. 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 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. Shareholders of the Fund may exchange their Class B shares for
Class B shares, 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 shares acquired as a result of an exchange. The applicable
sales charge will be that imposed by the fund in which shares were
initially purchased and the purchase date will be deemed to be the first
day of the month after the initial purchase, rather than the date of the
exchange.
Class B shares of the Fund may also be exchanged for Class B shares 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
B-24
<PAGE>
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.
At any time after acquiring shares of other funds participating in the
Class B exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B shares of the
Fund without subjecting such shares to any CDSC. Shares of any fund
participating in the Class B exchange privilege that were acquired through
reinvestment of dividends or distributions may be exchanged for Class B
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."
- --------------
1Source 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.
2The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount
automatically invested in shares of the Fund monthly by authorizing his or
her bank account or Prudential Securities account (including a Command
Account) to be debited to invest specified dollar amounts in shares of the
Fund. The investor's bank must be a member of the Automatic Clearing House
System. Share certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up
to the value of the shares in
B-25
<PAGE>
the shareholder's account. Withdrawals of Class B shares may be subject to
a CDSC. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred
Sales Charge-Class B Shares" 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
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 Compounding1
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.
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
B-26
<PAGE>
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 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 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 between 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 and Class B 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 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial
or contingent deferred sales charges but does not take into account any
federal or state income taxes that may be payable upon redemption.
The average annual total 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. 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%.
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A and
Class B 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.
The Fund's aggregate total return for Class A shares for the one and
four and one-twelfth year periods ended on February 28, 1994 was 8.81% and
37.26%, respectively. 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.
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
B-27
<PAGE>
CHART GOES HERE
1Source: 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.
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-
B-28
<PAGE>
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 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 shares. The per share distributions
of net capital gains, if any, will be paid in the same amount for Class A,
and Class B 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 to 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.
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
B-29
<PAGE>
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-30
<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-31
<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
Stewart & Stevenson
115,000 Services, Inc......... $ 5,721,250
Trinity Industries,
15,000 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
Viking Office Products,
30,000 Inc.*................. 1,402,500
------------
2,156,576
------------
Paper & Forest Products--0.8%
Louisiana Pacific
40,000 Corp.................. 1,720,000
------------
Pharmaceuticals--1.4%
50,000 Ivax Corp............... 1,756,250
Syncor International
54,000 Corp.*................ 1,174,500
------------
2,930,750
------------
Railroads--2.9%
Consolidated Rail
30,000 Corp.................. 1,863,750
30,000 CSX Corp................ 2,640,000
Illinois Central
42,700 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
Ultimate Electronics,
55,000 Inc.*................. 605,000
------------
6,991,875
------------
</TABLE>
See Notes to Financial Statements.
B-32
<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
------------
</TABLE>
<TABLE>
<CAPTION>
Par Value Value
(000) Description (Note 1)
<C> <S> <C>
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-33
<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-34
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 28,
Net Investment Loss 1994
-----------
<S> <C>
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>
Increase (Decrease) in Year Ended February 28,
Net Assets 1994 1993
<S> <C> <C>
------------ ------------
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. See Notes to Financial Statements.
B-35
<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 The following is a summary of
Policies 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-36
<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-37
<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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates 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 Purchases and sales of invest-
Securities 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:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
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-
--------- --------
--------- --------
</TABLE>
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-38
<PAGE>
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
----------- -------------
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
----------- -------------
----------- -------------
<CAPTION>
Class A
<S> <C> <C>
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)
----------- -------------
----------- -------------
<CAPTION>
Class B Shares Amount
<S> <C> <C>
----------- -------------
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)
----------- -------------
----------- -------------
</TABLE>
B-39
<PAGE>
PRUDENTIAL GROWTH FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------- ------------------------------------------------------
January 22,
1990(D)
PER SHARE Year Ended February 28/29, through Year Ended February 28/29,
OPERATING ------------------------------------- February 28, ------------------------------------------------------
PERFORMANCE: 1994 1993 1992** 1991 1990 1994 1993 1992** 1991 1990
---------- ------ ------ ------ ------------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
(D) 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-40
<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-41
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Financial Statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights
(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Report of Independent Accountants.
Portfolio of Investments at February 28, 1994.
Statement of Assets and Liabilities at February 28, 1994.
Statement of Operations for the year ended February 28, 1994.
Statement of Changes in Net Assets for the years ended
February 28, 1994 and February 28, 1993.
Notes to Financial Statements.
Financial Highlights.
(b) Exhibits:
1. (a) Amended and Restated Articles of Incorporation,
incorporated by reference to Exhibit No. 1(c) to Post-Effective
Amendment No. 12 to the Registration Statement of the Registrant
on Form N-1A (File No. 2-82764).
2. (a) Amended and Restated By-Laws, incorporated by reference to
Exhibit No. 2(c) to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A (File No. 2-82764).
4. Instruments defining rights of holders of the securities being
offered, incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 14 to the Registration Statement
on Form N-1A (File No. 2-82764).
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to
Exhibit No. 5(a) to Post-Effective Amendment No. 11 to the
Registration Statement of the Registrant on Form N-1A
(File No. 2-82764).
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Prudential-Bache Securities Inc.,
incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 11 to the Registration Statement of the Registrant
on Form N-1A (File No. 2-82764).
(c) Amended and Restated Management Agreement between the
Registrant and Prudential Mutual Fund Management, Inc.,
incorporated by reference to Exhibit No. 5(c) to
Post-Effective Amendment No. 12 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
(d) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Greg A. Smith Asset Management
Corporation, incorporated by reference to Exhibit No. 5(d) to
Post-Effective Amendment No. 12 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
6. (a) Distribution Agreement between Registrant and Prudential-Bache
Securities Inc., incorporated by reference to Exhibit No. 6(a)
to Pre-Effective Amendment No. 1 to the Registration
Statement of the Registrant on Form N-1A (File No. 2-82764).
(b) Distribution Agreement between the Registrant and
Prudential Mutual Fund Distributors, Inc. for Class A shares,
incorporated by reference to Exhibit No. 6(b) to
Post-Effective Amendment No. 11 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
(c) Amended and Restated Distribution Agreement between the
Registrant and Prudential-Bache Securities Inc. for Class B
shares, incorporated by reference to Exhibit No. 6(c) to
Post-Effective Amendment No. 11 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
(d) Distribution Agreement between the Registrant and
Prudential Mutual Fund Distributors, Inc. for Class A shares
dated July 1, 1993, incorporated by reference to Exhibit No.
6(d) to Post-Effective Amendment No. 14 to the Registration
Statement of the Registrant on Form N-1A (File No. 2-82764).
C-1
<PAGE>
(e) Distribution Agreement between the Registrant and
Prudential Securities Incorporated for Class B shares dated
July 1, 1993, incorporated by reference to Exhibit No. 6(e) to
Post-Effective Amendment No. 14 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
8. Custodian Agreement between the Registrant and State Street
Bank and Trust Company, incorporated by reference to Exhibit
No. 8 to Post-Effective Amendment No. 1 to the Registration
Statement of the Registrant on Form N-1A (File No. 2-82764).
9. Transfer Agency and Service Agreement between Registrant and
Prudential Mutual Fund Services, Inc., incorporated by
reference to Exhibit No. 9(b) to Post-Effective Amendment No.
6 to the Registration Statement of the Registrant on Form N-1A
(File No. 2-82764).
10. Opinion of counsel, incorporated by reference to Exhibit No. 10
to Pre-Effective Amendment No. 1 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
11. Consent of Independent Accountants.*
13. Purchase Agreement between Registrant and Prudential-Bache
Securities Inc., incorporated by reference to Exhibit No. 13
to Pre-Effective Amendment No. 1 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
15. (a) Plan of Distribution, pursuant to Rule 12b-1, of the
Registrant, incorporated by reference to Exhibit No. 15 to
Post-Effective Amendment No. 1 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
(b) Plan of Distribution for Class A shares, incorporated by
reference to Exhibit No. 15(b) to Post-Effective Amendment No.
11 to the Registration Statement of the Registrant on Form
N-1A (File No. 2-82764).
(c) Amended and Restated Plan of Distribution for Class B
shares, incorporated by reference to Exhibit No. 15(c) to
Post-Effective Amendment No. 11 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
(d) Distribution and Service Plan between the Registrant
(Class A shares) and Prudential Mutual Fund Distributors, Inc,
incorporated by reference to Exhibit No. 15(d) to Post-
Effective Amendment No. 14 to the Registration Statement of
the Registrant on Form N-1A (File No. 2-82764).
(e) Distribution and Service Plan between the Registrant
(Class B shares) and Prudential Securities Incorporated,
incorporated by reference to Exhibit No. 15(e) to
Post-Effective Amendment No. 14 to the Registration Statement
of the Registrant on Form N-1A (File No. 2-82764).
16. (a) Schedule of Calculation of Average Annual Total Return,
incorporated by reference to Exhibit No. 16 to Post-Effective
Amendment No. 7 to the Registration Statement of the
Registrant on Form N-1A (File No. 2-82764).
(b) Schedule of Calculation of Aggregate Total Return for
Class A and Class B shares, incorporated by reference to
Exhibit No. 16(b) to Post-Effective Amendment No. 13 to the
Registration Statement of the Registrant on Form N-1A (File
No. 2-82764).
Other Exhibits
- ---------------
*Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
As of May 27, 1994, there were 2,984 and 53,684 record holders
of Class A and Class B shares, respectively, of common stock of the
Registrant.
C-2
<PAGE>
Item 27. Indemnification
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940 (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees
and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any
action or failure to act, except for bad faith, willful misfeasance, gross
negligence or reckless disregard of duties, and those individuals may be
indemnified against liabilities in connection with the Registrant, subject
to the same exceptions. Section 2-418 of Maryland General Corporation Law
permits indemnification of directors who acted in good faith and reasonably
believed that the conduct was in the best interests of the Registrant. As
permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of the
Distribution Agreement (Exhibit 6 to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which
it may incur, except liabilities arising from bad faith, gross negligence,
willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in connection
with the successful defense of any action, suit or proceeding) is asserted
against the Registrant by such director, officer or controlling person in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the 1940 Act and will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers
and directors against liabilities, and certain costs of defending claims
against such officers and directors, to the extent such officers and
directors are not found to have committed conduct constituting willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties. The insurance policy also insures the
Registrant against the cost of indemnification payments to officers and
directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and Greg A. Smith Asset Management Corporation
(GSAM), respectively, to liabilities arising from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or
from reckless disregard by them of their respective obligations and duties
under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Sections 17(h) and
17(i) of such Act remains in effect and is consistently applied.
Item 28. Business and other Connections of Investment Adviser
(a) Prudential Mutual Fund Management, Inc.
See "How the Fund Is Managed-Manager" in the Prospectus constituting
Part A of this Registration Statement and "Manager" in the Statement of
Additional Information constituting Part B of this Registration
Statement.
The business and other connections of the officers of PMF are listed
in Schedules A and D of Form ADV of PMF as currently on file with the
Securities and Exchange Commission, the text of which is hereby
incorporated by reference (File No. 801-31104, filed March 30, 1994).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice Executive Vice President, PMF; Senior Vice President, Prudential
President and Securities Incorporated (Prudential Securities)
Director of
Marketing
John D. Brookmeyer, Jr. Director Senior Vice President, The Prudential Insurance Company
Two Gateway Center of America (Prudential)
Newark, NJ 07102
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Susan C. Cote Senior Vice President Senior Vice President, PMF; Senior Vice President, Prudential
Securities
Fred A. Fiandaca Executive Vice Executive Vice President, Chief Operating Officer and Director, PMF;
Raritan Plaza One President, Chief Chief Executive Officer and Director, Prudential Mutual
Edison, NJ 08847 Operating Officer Fund Services, Inc.
and Director
Stephen P. Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President, Prudential
Securities
Frank W. Giordano Executive Vice Executive Vice President, General Counsel and Secretary, PMF; Senior
President, General Vice President, Prudential Securities
Counsel and
Secretary
Robert F. Gunia Executive Vice Executive Vice President, Chief Administrative Officer, Chief Financial
President, Chief Officer and Director, PMF; Senior Vice President, Prudential
Financial and Securities
Administrative
Officer, Treasurer
and Director
Eugene B. Heimberg Director Senior Vice President, Prudential; President, Director and Chief
Prudential Plaza Investment Officer, PIC
Newark, NJ 07101
Lawrence C. McQuade Vice Chairman Vice Chairman, PMF
Leland B. Paton Director Executive Vice President and Director, Prudential Securities; Director,
Prudential Securities Group, Inc. (PSG)
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF; Executive Vice
Executive Officer President, Director and Member of Operating Committee, Prudential
and Director Securities; Director, PSG
S. Jane Rose Senior Vice President, Senior Vice President, Senior Counsel and Assistant Secretary, PMF;
Senior Counsel and Senior Vice President and Senior Counsel, Prudential Securities
Assistant Secretary
Donald G. Southwell Director Senior Vice President, Prudential; Director, PSG
213 Washington Street
Newark, NJ 07102
</TABLE>
Greg A. Smith Asset Management, the Investment Adviser of the
Registrant, is a registered investment adviser primarily engaged in the
investment advisory business. Mr. Smith is the president and principal
stockholder of the Subadviser. He is also a consultant to Prudential
Securities and acts as Prudential Securities' Chief Investment Strategist.
Item 29. Principal Underwriters
(a)(i) Prudential Securities
Prudential Securities is distributor for Prudential Government
Securities Trust (Intermediate Term Series) and for Class B shares of
Prudential Adjustable Rate Securities Fund, Inc., The BlackRock Government
Income Trust, Prudential California Municipal Fund (California Series),
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential
FlexiFund, Prudential Global Fund, Inc., Prudential-Bache Global Genesis
Fund, Inc. (d/b/a Prudential Global Genesis Fund), Prudential-Bache Global
Natural Resources Fund, Inc. (d/b/a Prudential Global Natural Resources
Fund), Prudential-Bache GNMA Fund, Inc. (d/b/a Prudential GNMA Fund),
Prudential-Bache Government Plus Fund, Inc. (d/b/a Prudential Government
Plus Fund), Prudential Growth Fund, Inc., Prudential Growth Opportunity
Fund, Inc. (d/b/a Prudential Growth Opportunity Fund), Prudential-Bache
High
C-4
<PAGE>
Yield Fund, Inc. (d/b/a Prudential High Yield Fund), Prudential
IncomeVertible (R) Fund, Inc., Prudential Intermediate Global Income Fund,
Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund (except Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series, New Jersey
Money Market Series and Florida Series), Prudential-Bache National
Municipals Fund, Inc. (d/b/a Prudential National Municipals Fund),
Prudential Pacific Growth Fund, Inc., Prudential Short-Term Global Income
Fund, Inc. Prudential U.S. Government Fund, Prudential-Bache Utility Fund,
Inc. (d/b/a Prudential Utility Fund), Global Utility Fund, Inc., Nicholas-
Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund) and The
BlackRock Government Income Trust. Prudential Securities is also a depositor
for the following unit investment trusts:
The Corporate Income Fund
Corporate Investment Trust Fund
Equity Income Fund
Government Securities Income Fund
International Bond Fund
Municipal Investment Trust
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series and California
Income Series and Class A shares of the California Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money
Market Series), Prudential-Bache MoneyMart Assets (d/b/a Prudential
MoneyMart Assets), Prudential Municipal Series Fund (Connecticut Money
Market Series, Massachusetts Money Market Series, New York Money Market
Series, New Jersey Money Market Series, and Florida Series), Prudential
Institutional Liquidity Portfolio, Inc., Prudential-Bache Special Money
Market Fund, Inc. (d/b/a Prudential Special Money Market Fund), Prudential-
Bache Structured Maturity Fund, Inc. (d/b/a Prudential Structured Maturity
Fund), Prudential-Bache Tax-Free Money Fund, Inc. (d/b/a Prudential Tax-
Free Money Fund), and for Class A shares of Prudential Adjustable Rate
Securities Fund, Inc., The BlackRock Government Income Trust, Prudential
California Municipal Fund (California Series), Prudential-Bache Equity
Fund, Inc. (d/b/a Prudential Equity Fund), Prudential Equity Income Fund,
Prudential FlexiFund, Prudential Global Fund, Inc., Prudential-Bache Global
Genesis Fund, Inc. (d/b/a Prudential Global Genesis Fund), Prudential-
Bache Global Natural Resources Fund, Inc. (d/b/a Prudential Global Natural
Resources Fund), Prudential-Bache GNMA Fund, Inc. (d/b/a Prudential GNMA
Fund), Prudential-Bache Government Plus Fund, Inc. (d/b/a Prudential
Government Plus Fund), Prudential Growth Fund, Inc., Prudential-Bache
Growth Opportunity Fund, Inc. (d/b/a Prudential Growth Opportunity Fund),
Prudential-Bache High Yield Fund, Inc. (d/b/a Prudential High Yield Fund),
Prudential IncomeVertible(R) Fund, Inc., Prudential Intermediate Global
Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund (Arizona Series,
Georgia Series, Maryland Series, Massachusetts Series, Michigan Series,
Minnesota Series, New Jersey Series, North Carolina Series, Ohio Series
and Pennsylvania Series), Prudential-Bache National Municipals Fund, Inc.
(d/b/a Prudential National Municipals Fund), Prudential Pacific Growth
Fund, Inc., Prudential Short-Term Global Income Fund, Inc., Prudential U.S.
Government Fund and Prudential-Bache Utility Fund, Inc. (d/b/a Prudential
Utility Fund), Global Utility Fund, Inc., and Nicholas-Applegate Fund,
Inc. (Nicholas-Applegate Growth Equity Fund) and the Target Portfolio
Trust.
(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------- ------------- -------------
<S> <C> <C>
Alan D. Hogan ............. Executive Vice President, None
Chief Administrative
Officer and Director
Howard A. Knight .......... Executive Vice President, Director None
Corporate Strategy and New Business
Development
George A. Murray .......... Executive Vice President and Director None
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------- ------------- -------------
<S> <C> <C>
John P. Murray ............ Executive Vice President and Director None
of Risk Management
Leland B. Paton ........... Executive Vice President and None
Director
Richard A. Redeker ........ Director Director
Hardwick Simmons .......... Chief Executive Officer, None
President and Director
Lee Spencer ............... General Counsel, Executive Vice President None
and Director
(ii) Prudential Mutual Fund Distributors, Inc.
Joanne Accurso-Soto ....... Vice President None
Dennis Annarumma .......... Vice President, Assistant Treasurer and None
Assistant Comptroller
Phyllis J. Berman ......... Vice President None
Fred A. Fiandaca .......... President, Chief Executive Officer and None
Raritan Plaza One Director
Edison, NJ 08847
Stephen P. Fisher ......... Vice President None
Frank W. Giordano ......... Executive Vice President, General Counsel, None
Secretary and Director
Robert F. Gunia ........... Executive Vice President, Treasurer, Vice President
Comptroller and Director
Andrew J. Varley .......... Vice President None
Anita L. Whelan ........... Vice President and Assistant Secretary None
<FN>
- ---------------
(1)The address of each person named is One Seaport Plaza, New York, NY
10292 unless otherwise indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated
person of the Registrant.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at
the offices of State Street Bank and Trust Company, One Heritage Drive,
North Quincy, Massachusetts, The Prudential Investment Corporation,
Prudential Plaza, 751 Broad Street, Newark, New Jersey, the Registrant, One
Seaport Plaza, New York, New York, and Prudential Mutual Fund Services,
Inc., Raritan Plaza One, Edison, New Jersey. Documents required by Rules
31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at
Three Gateway Center, documents required by Rules 31a-1(b)(4) and (11) and
31a-1(d) at One Seaport Plaza and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and
the Rules promulgated thereunder will be kept by State Street Bank and
Trust Company and Prudential Mutual Fund Services, Inc.
Item 31. Management Services
Other than as set forth under the captions "How the Fund is
Managed-Manager" and "How the Fund is Managed-Distributor" in the
Prospectus and the captions "Manager" and "Distributor" in the Statement
of Additional Information, constituting Parts A and B, respectively, of
this Registration Statement, Registrant is not a party to any management-
related service contract.
Item 32. Undertakings
The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest annual report
to shareholders upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Post-Effective Amendment to
the Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York,
on the 27th day of June, 1994.
PRUDENTIAL GROWTH FUND, INC.
/s/ Lawrence C. McQuade
----------------------------------
(Lawrence C. McQuade, President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Lawrence C. McQuade President and Director June 27, 1994
- ----------------------------------------
Lawrence C. McQuade
/s/ John C. Davis Director June 27, 1994
- ----------------------------------------
John C. Davis
/s/ Thomas A. Owens, Jr. Director June 27, 1994
- ----------------------------------------
Thomas A. Owens, Jr.
/s/ Richard A. Redeker Director June 27, 1994
- ----------------------------------------
Richard A. Redeker
/s/ Gerald A. Stahl Director June 27, 1994
- ----------------------------------------
Gerald A. Stahl
/s/ Stephen Stoneburn Director June 27, 1994
- ----------------------------------------
Stephen Stoneburn
/s/ Robert H. Wellington Director June 27, 1994
- ----------------------------------------
Robert H. Wellington
/s/ Susan C. Cote Principal Financial June 27, 1994
- ---------------------------------------- and Accounting
Susan C. Cote Officer and
Treasurer
<PAGE>
EXHIBIT INDEX
1. (a) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit No. 1(c) to Post-Effective Amendment No. 12 to the
Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
2. (a) Amended and Restated By-Laws, incorporated by reference to Exhibit
No. 2(c) to Post-Effective Amendment No. 12 to the Registration
Statement of the Registrant on Form N-1A (File No. 2-82764).
4. Instruments Defining Rights of Shareholders, incorporated by reference
to Exhibit No. 4(a) to Post-Effective Amendment No. 14 to the
Registration Statement of the Registrant on Form N-1A (File No. 2-82764).
5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc., incorporated by reference to Exhibit No. 5(a) to
Post-Effective Amendment No. 11 to the Registration Statement of the
Registrant on Form N-1A (File No. 2-82764).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and Prudential-Bache Securities Inc., incorporated by reference to
Exhibit No. 5(b) to Post-Effective Amendment No. 11 to the Registration
Statement of the Registrant on Form N-1A (File No. 2-82764).
(c) Amended and Restated Management Agreement between the Registrant
and Prudential Mutual Fund Management, Inc., incorporated by reference
to Exhibit No. 51(c) to Post-Effective Amendment No. 12 to the
Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
(d) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and Greg A. Smith Asset Management Corporation, incorporated by
reference to Exhibit No. 5(d) to Post-Effective Amendment No. 12 to the
Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
6. (a) Distribution Agreement between Registrant and Prudential-Bache
Securities Inc., incorporated by reference to Exhibit No. 6(a) to Pre-
Effective Amendment No. 1 to the Registration Statement of the
Registrant on Form N-1A (File No. 2-82764).
(b) Distribution Agreement between the Registrant and Prudential Mutual
Fund Distributors, Inc. for Class A shares, incorporated by reference
to Exhibit No. 6(b) to Post-Effective Amendment No. 11 to the
Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
(c) Amended and Restated Distribution Agreement between the Registrant
and Prudential-Bache Securities Inc. for Class B shares, incorporated
by reference to Exhibit No. 6(c) to Post-Effective Amendment No. 11 to
the Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
(d) Distribution Agreement between the Registrant and Prudential Mutual
Fund Distributors, Inc. for Class A shares dated July 1, 1993,
incorporated by reference to Exhibit No. 6(d) to Post-Effective
Amendment No. 14 to the Registration Statement of the Registrant on
Form N-1A (File No. 2-82764).
(e) Distribution Agreement between the Registrant and Prudential
Securities Incorporated for Class B shares dated July 1, 1993,
incorporated by reference to Exhibit No. 6(e) to Post-Effective
Amendment No. 14 to the Registration Statement of the Registrant on
Form N-1A (File No. 2-82764).
8. Custodian Agreement between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit No. 8 to Post-
Effective Amendment No. 1 to the Registration Statement of the
Registrant on Form N-1A (File No. 2-82764).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit No. 9(b) to Post-Effective Amendment No. 6 to the Registration
Statement of the Registrant on Form N-1A (File No. 2-82764).
10. Opinion of counsel, incorporated by reference to Exhibit No. 10 to Pre-
Effective Amendment No. 1 to the Registration Statement of the
Registrant on Form N-1A (File No. 2-82764).
11. Consent of Independent Accountants.*
13. Purchase Agreement between the Registrant and Prudential-Bache Securities
Inc., incorporated by reference to Exhibit No. 13 to Pre-Effective
Amendment No. 1 to the Registration Statement of the Registrant on Form
N-1A (File No. 2-82764).
15. (a) Plan of Distribution pursuant to Rule 12b-1 of the Registrant,
incorporated by reference to Exhibit No. 15 to Post-Effective Amendment
No. 1 to the Registration Statement of the Registrant on Form N-1A
(File No. 2-82764).
(b) Plan of Distribution for Class A shares, incorporated by reference
to Exhibit No. 15(b) to Post-Effective Amendment No. 11 to the
Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
(c) Amended and Restated Plan of Distribution for Class B shares,
incorporated by reference to Exhibit No. 15(c) to Post-Effective
Amendment No. 11 to the Registration Statement of the Registrant on
Form N-1A (File No. 2-82764).
<PAGE>
(d) Distribution and Service Plan between the Registrant (Class A
shares) and Prudential Mutual Fund Distributors, Inc., incorporated by
reference to Exhibit No. 15(d) to Post-Effective Amendment No. 14 to
the Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
(e) Distribution and Service Plan between the Registrant (Class B
shares) and Prudential Securities Incorporated, incorporated by
reference to Exhibit No. 15(e) to Post-Effective Amendment No. 14 to
the Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
16. (a) Schedule of Calculation of Average Annual Total Return incorporated
by reference to Exhibit No. 16 to Post-Effective Amendment No. 7 to the
Registration Statement of the Registrant on Form N-1A (File No.
2-82764).
(b) Schedule of Calculation of Aggregate Total Return for Class A and
Class B shares incorporated by reference to Exhibit No. 16 to Post-
Effective Amendment No. 13 to the Registration Statement of the
Registrant on Form N-1A (File No. 2-82764).
Other Exhibits
- ---------------
*Filed herewith.
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional
Information constituting part of this Post-Effective Amendment No.
15 to the registration statement on Form N-1A (the "Registration
Statement" of our report dated April 11, 1994, relating to the
financial statements and financial highlights of Prudential Growth
Fund, Inc., which appears in such Statement of Additional
Information, and to the incorporation by reference of our report
into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading
"Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants" in such Statement of Additional Information and to the
reference to us under the heading "Financial Highlights" in such
Prospectus.
/s/ Price Waterhouse
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, NY 10036
June 23, 1994
