Prudential Global Fund, Inc.
Pursuant to Rule 497(c)
Registration No. 2-89725
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Prospectus dated August 1, 1994
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Prudential Global Fund, Inc. (the Fund) is an open-end, diversified management
investment company. Its investment objective is to seek long-term growth of
capital, with income as a secondary objective. The Fund seeks to achieve its
objective through investment in a diversified portfolio of securities which will
consist of marketable securities of U.S. and non-U.S. issuers. The Fund may
invest in all types of common stocks and equivalents (such as convertible debt
securities and warrants), preferred stocks, bonds and other debt obligations,
including money market instruments, of foreign and domestic companies and
governments, governmental agencies and international organizations. The Fund may
also invest in stock options, options on debt securities, options on stock
indices, stock index futures and options on stock index futures. 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 Fund is not intended to constitute a complete investment program. The
Fund intends to pay annual dividends consisting of substantially all of its
net investment income and net short-term and long-term capital gains, if any.
Because of its objective and policies, including its international
orientation, the Fund may be considered of a speculative nature and subject to
greater investment risks than are assumed by certain other investment
companies which invest solely in domestic securities. See "How the Fund
Invests--Special Considerations and Risks".
This Prospectus sets forth concisely the information about the Fund that
a prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated August 1, 1994, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund, at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
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FUND HIGHLIGHTS
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The following summary is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
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What is Prudential Global Fund, Inc.?
Prudential Global 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 sale 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 long-term growth of capital
with income as a secondary objective. The Fund seeks to achieve its objective
through investment in a diversified portfolio of marketable securities of U.S.
and non-U.S. issuers. There can be no assurance that the Fund's objective will
be achieved. See "How the Fund Invests--Investment Objective and Policies" at
page 7.
Risk Factors and Special Characteristics
While the Fund is not required to maintain any particular geographic or
currency mix of its investments, under normal circumstances the Fund intends
to maintain investments in a minimum of four countries, which may include the
United States. The Fund may, from time to time, invest up to 65% of its assets
in companies and governments located in any one country. The Fund may invest
in all types of common stocks and equivalents, preferred stocks, bonds and
other debt obligations of foreign and domestic companies, governments,
government agencies and international organizations. See "How the Fund
Invests--Investment Objective and Policies" at page 7. Investing in securities
of foreign companies and countries involves certain considerations and risks
not typically associated with investing in U.S. Government Securities and
those of domestic companies. See "How the Fund Invests--Special Considerations
and Risks" at page 13. The Fund may also engage in hedging and income
enhancement strategies, including derivatives, the purchase and sale of put
and call options, foreign currency forward contracts, options and futures
transactions and related short-term trading. See "How the Fund
Invests--Hedging and Income Enhancement Strategies" at page 8.
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 of
.75 of 1% of the Fund's average daily net assets. As of June 30, 1994, PMF
served as manager or administrator to 66 investment companies, including 37
mutual funds, with aggregate assets of approximately $47 billion. The
Prudential Investment Corporation (PIC or 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
14. The management fee is higher than that paid by most other investment
companies.
Who Distributes the Fund's Shares?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .25 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a
major securities underwriter and securities and commodities broker, acts as
the Distributor of the Fund's Class B and Class C shares and is paid an annual
distribution and service fee at the rate of up to 1% of the average daily net
assets of each of the Class B and Class C shares. See "How the Fund is
Managed--Distributor" at page 14.
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2
<PAGE>
What is the Minimum Investment?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment is
$100 for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How
to Buy Shares of the Fund" at page 20 and "Shareholder Guide--Shareholder
Services" at page 28.
How Do I Purchase Shares?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent) at the net asset value per share (NAV) next determined after receipt of
your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). See "How The
Fund Values Its Shares" at page 16 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 20.
What Are My Purchase Alternatives?
The Fund offers three classes of shares:
. Class I Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge and for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 20.
How Do I Sell My Shares?
You may redeem shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 23.
How are Dividends and Distributions Paid?
The Fund expects to pay dividends of net investment income 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 17.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
Shareholder Transactions Expenses+ Class A Shares Class B Shares Class C Shares
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price) ....................... 5% None None
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends ................................ None None None
Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ... None 5% during the first year, 1% on redemptions
decreasing by 1% annually made within one
to 1% in the fifth and sixth year of purchase
years and 0% the seventh
year*
Redemption Fees ...................................... None None None
Exchange Fees ........................................ None None None
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets) Class A Shares Class B Shares Class C Shares**
-------------- -------------- --------------
<S> <C> <C> <C>
Management Fees ...................................... .75% .75% .75%
12b-1 Fees ........................................... .25%++ .88% 1.00%**
Other Expenses ....................................... .61% .61% .61%
---- ---- ----
Total Fund Operating Expenses ........................ 1.61% 2.24% 2.36%
==== ==== ====
<CAPTION>
1 3 5 10
Example Year Years Years Years
----- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A ............................................... $66 $ 98 $133 $232
Class B ............................................... $73 $100 $130 $234
Class C** ............................................. $34 $ 74 $126 $270
You would pay the following expenses on the same
investment, assuming no redemption:
Class A ............................................... $68 $101 $136 $234
Class B ............................................... $23 $ 70 $120 $234
Class C** ............................................. $24 $ 74 $126 $270
<CAPTION>
The above example with respect to Class A and Class B shares is based on
restated data for the Fund's fiscal year ended October 31, 1993. The above
example with respect to Class C shares is based on expenses expected to have
been incurred if Class C shares had been in existence during the fiscal year
ended October 31, 1993. The example should not be considered a representation of
past or future expenses. Actual expenses may be greater or less than those
shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed". "Other Expenses" includes operating expenses of
the Fund such as directors' and professional fees, registration fees, reports to
shareholders, transfer agency and custodian fees and franchise taxes.
___________
<FN>
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended October 31, 1993.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
the Fund rather than on a per shareholder basis. Therefore long-term
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay up to an annual rate of .30 of 1% of the average daily net assets
of the Class A shares, the Distributor has agreed to limit its distribution
fees expenses with respect to Class A shares of the Fund to .25 of 1% of
the average daily net asset value of the Class A shares for the fiscal year
ending October 31, 1994. Total operating expenses without such limitation
would be 1.66%. See "How the Fund is Managed--Distributor".
</FN>
</TABLE>
4
<PAGE>
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FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class A Shares)
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The following financial highlights (with the exception of the six months
ended April 30, 1994)have been audited by Deloitte & Touche, 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 the periods indicated. The information is based on data contained in
the financial statements. No Class C shares were outstanding during the
periods indicated.
<TABLE>
<CAPTION>
Class A
--------------------------------------------
Six Months January 22,
Ended 1990+
April 30, Year ended October 31, through
1994 ----------------------------- October 31,
(unaudited) 1993 1992 1991 1990
---------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:(1)
Net asset value, beginning of period ................ $ 13.17 $ 9.58 $10.08 $ 9.19 $10.38
------- ------ ------ ------ ------
Income from investment operations:
Net investment income (loss) ........................ (.02) 0.02 0.03 0.07 0.12
Net realized and unrealized gain (loss) on investment
and foreign currency transactions .................. .83 3.57 (.53) 1.02 (1.31)
------ ----- ------ ----- ------
Total from investment operations .................... .81 3.59 (.50) 1.09 (1.19)
------ ----- ------ ----- ------
Dividends from net investment income ................ -- -- -- (0.16) --
Distributions from net realized gains on investment
and foreign currency transactions .................. -- -- -- (0.04) --
------ ----- ------ ----- ------
Total distributions ................................. -- -- -- (0.20) --
------ ----- ------ ----- ------
Net asset value, end of period ...................... $ 13.98 $13.17 $ 9.58 $10.08 $ 9.19
====== ====== ======= ====== ========
TOTAL RETURN*** ..................................... 6.15% 37.47% (4.96)% 12.11% (11.46)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ..................... $59,205 $42,021 $13,973 $14,154 $ 8,727
Average net assets (000) ............................ $52,804 $21,409 $14,758 $10,593 $ 7,151
Ratios to average net assets:
Expenses, including distribution fees .............. 1.38%* 1.56% 1.71% 1.72% 1.57%*
Expenses, excluding distribution fees .............. 1.15%* 1.36% 1.51% 1.52% 1.37%*
Net investment income (loss) ....................... (0.26)%* 0.20% 0.22% 0.65% 1.61%*
Portfolio turnover rate ............................. 28% 69% 58% 126% 35%
____________
<FN>
* Annualized.
+ 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 a full year are not
annualized.
(1) Based on average month-end shares outstanding, by class.
</FN>
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class B Shares)
The following financial highlights (with the exception of the six months
ended April 30, 1994) for the five years ended October 31, 1993 have been
audited by Deloitte & Touche, 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 the periods indicated. The
information is based on data contained in the financial statements. No Class C
shares were outstanding during the periods indicated.
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Six Months
Ended
April 30, Year ended October 31,
1994 ------------------------------------------------
(unaudited) 1993(1) 1992(1) 1991(1) 1990(1) 1989(1)
---------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE (1):
Net asset value, beginning
of period ....................... $12.94 $ 9.47 $10.05 $ 9.14 $10.46 $10.09
------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss) ..... (.06) (0.04) (0.05) -- 0.05 0.15
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions .................... .81 3.51 (0.53) 1.02 (1.10) 0.53
------ ------ ------ ------ ------ ------
Total from investment
operations ...................... .75 3.47 (0.58) 1.02 (1.05) 0.68
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income ............... -- -- -- (0.07) (0.18) (0.19)
Distributions paid to
shareholders from net realized
gains on investment and foreign
currency transactions ........... -- -- -- (0.04) (0.09) (0.12)
------ ------ ------ ------ ------ -----
Total distributions .............. -- -- -- (0.11) (0.27) (0.31)
------ ------ ------ ------ ------ -----
Net asset value, end of period ... $13.69 $12.94 $ 9.47 $10.05 $ 9.14 10.46
====== ====== ====== ====== ====== =====
TOTAL RETURN**** ................. 5.80% 36.64% (5.77)% 11.29% (10.43)% 6.92%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .. $355,615 $251,133 $178,438 $249,582 $261,555 $385,578
Average net assets (000) ......... $316,030 $183,741 $210,464 $253,866 $328,467 $448,737
Ratios to average net assets:
Expenses, including
distribution fees ............. 2.08%* 2.24% 2.40% 2.44% 2.23% 1.82%
Expenses, excluding
distribution fees ............. 1.15%* 1.36% 1.51% 1.53% 1.37% 1.34%
Net investment income (loss) .... (0.95)%* (0.39)% (0.47)% (0.01)% 0.51% 1.45%
Portfolio turnover rate .......... 28% 69% 58% 126% 35% 60%
<CAPTION>
Class B
------------------------------------------------
May 16,
1984++
Year ended October 31, through
----------------------------------- October 31,
1988(1)*** 1987(1) 1986(1) 1985** 1984**
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period ....................... $ 9.86 $9.96 $6.95 $5.23 $5.00
------ ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) ..... 0.17+ 0.06 (0.01)+ 0.08+ 0.08+
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions .................... 1.11 0.79 3.23 1.72 0.15
------ ----- ----- ----- -----
Total from investment
operations ...................... 1.28 0.85 3.22 1.80 0.23
------ ----- ----- ----- -----
Less distributions:
Dividends from net
investment income ............... (0.07) -- (0.02) (0.05) --
Distributions paid to
shareholders from net realized
gains on investment and foreign
currency transactions ........... (0.98) (0.95) (0.19) (0.03) --
------ ----- ----- ----- -----
Total distributions .............. (1.05) (0.95) (0.21) (0.08) --
-------- ------- ------- ------ ------
Net asset value, end of period ... $10.09 $9.86 $9.96 $6.95 $5.23
======== ======= ======= ====== =======
TOTAL RETURN**** ................. 13.58% 8.81% 46.45% 34.93% 4.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .. $523,743 $628,542 $376,839 $61,673 $7,818
Average net assets (000) ......... $571,420 $697,486 $238,239 $26,087 $5,687
Ratios to average net assets:
Expenses, including
distribution fees ............. 1.86%+ 1.96% 1.89%+ 2.07%+ 2.30%+
Expenses, excluding
distribution fees ............. 1.17%+ 1.14% 1.03%+ 1.39%+ 1.59%+
Net investment income (loss) .... 1.71%+ 0.52% (0.13)%+ 1.81%+ 3.94%+
Portfolio turnover rate .......... 82% 135% 80% 123% 6%
____________
<FN>
* Annualized.
** Adjusted for 2-for-1 stock split paid to shareholders of record on May 15,
1986.
*** On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since
then has acted as manager of the Fund. See "Manager" in the Statement of
Additional Information.
**** 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.
+ Net of expense subsidy or reimbursement.
++ Commencement of offering of Class B shares.
(1) Based on average month-end shares outstanding by class.
</FN>
</TABLE>
6
<PAGE>
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HOW THE FUND INVESTS
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of
capital, with income as a secondary objective. The Fund will seek to achieve
its objectives through investment in a diversified portfolio of securities
which will consist of marketable securities of U.S. and non-U.S. issuers.
Marketable securities are those for which market quotations are readily
available. There can be no assurance that the Fund will achieve its investment
objectives. See "Investment Objective and Policies" in the Statement of
Additional Information.
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
(the Investment Company Act). Fund policies that are not fundamental may be
modified by the Board of Directors.
The Fund may invest in all types of common stocks and equivalents (such as
convertible debt securities and warrants), preferred stocks, bonds and other
debt obligations, including money market instruments, of foreign and domestic
companies and governments, governmental agencies and international
organizations. The Fund may also invest in stock options, options on debt
securities, options on stock indices, stock index futures and options on stock
index futures.
Although the Fund is not required to maintain any particular geographic or
currency mix of its investments, nor required to maintain any particular
proportion of stocks, bonds or other securities in its portfolio, the Fund, in
view of its investment objective, presently expects to invest its assets
primarily in common stocks of U.S. and non-U.S. issuers. The Fund may, however,
invest substantially or primarily in debt securities of U.S. and non-U.S.
issuers when it appears that the capital appreciation available from
investments in such securities will equal or exceed the capital appreciation
available from investments in equity securities, or when the Fund is
temporarily in a defensive position. The Fund will purchase "investment grade"
debt including convertible debt obligations. Investment grade debt obligations
are bonds rated within the four highest quality grades as determined by Moody's
Investors Service (Moody's) (currently Aaa, Aa, A and Baa for bonds, MIGI,
MIG2, MIG3 and MIG4 for notes and P-1 for commercial paper), or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A and BBB for bonds, SP-1 and
SP-2 for notes and A-1 for commercial paper), or by another nationally
recognized statistical rating organization (NRSRO) or in unrated securities of
equivalent quality. Securities rated Baa by Moody's or BBB by S&P, although
considered to be investment grade, lack outstanding investment characteristics
and, in fact, have speculative characteristics. Lower rated securities are
subject to a greater risk of loss of principal and interest. Debt securities
may be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Moreover, should extraordinary market
conditions warrant, the Fund may temporarily be invested primarily in
securities of U.S. issuers.
The Fund is intended to provide investors with the opportunity to invest
in a portfolio of securities of companies and governments located throughout
the world. In making the allocation of assets among the various countries and
geographic regions, the Fund's investment adviser ordinarily considers such
factors as prospects for relative economic growth between foreign countries;
expected levels of inflation and interest rates; government policies
influencing business conditions; the range of individual investment
opportunities available to international investors; and other pertinent
financial, tax, social, political and national factors--all in relation to the
prevailing prices of the securities in each country or region.
Investments may be made in companies based in (or governments of or
within) the Pacific Basin (such as Japan, Australia, Singapore, Malaysia and
Hong Kong) and Western Europe (such as the United Kingdom, Germany,
Switzerland, the Netherlands, France, Belgium, Spain and Scandinavia), as well
as the United States, Canada and such other areas and countries as the
investment adviser may determine from time to time. The Fund intends to
maintain investments in a minimum of four countries, which may include the
United States, but may, from time to time, invest up to 65% of its assets in
companies and governments located in any one country.
7
<PAGE>
The Fund may invest in securities not listed on securities exchanges.
These securities will generally have an established market (such as the
over-the-counter market), the depth and liquidity of which may vary from time
to time and from security to security. In addition, the Fund may invest to a
limited extent in securities of companies which have been in existence for less
than three years, in securities for which market quotations are not readily
available and in securities of other registered investment companies. See
"Investment Restrictions" in the Statement of Additional Information.
In analyzing companies for investment, the investment adviser ordinarily
looks for one or more of the following characteristics: prospects for
above-average earnings growth per share; high return on invested capital;
healthy balance sheet; sound financial and accounting policies and overall
financial strength; strong competitive advantages; effective research and
product development and marketing; efficient service; pricing flexibility;
strength of management; and general operating characteristics which will enable
the companies to compete successfully in their marketplace--all in relation to
the prevailing prices of the securities of such companies.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
The Fund may also engage in various portfolio strategies, including
derivatives, to reduce certain risks of its investments and to attempt to
enhance income. These strategies include the purchase and sale of put and call
options, and the purchase and sale of stock index futures and combinations
thereof. The Manager will use such techniques as market conditions warrant. 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 continue to be developed and the Fund may use these new
investments and techniques to the extent consistent with its investment
objective and policies.
Options Transactions
Exchange-Traded Options. The Fund may purchase and write (i.e., sell)
exchange traded put and call options on equity securities, debt securities or
stock indices.
A call option on equity securities gives the purchaser, in exchange for a
premium paid, 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"). 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 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 in excess of the
exercise price of the option during the period that the option is open.
A put option on equity securities gives the purchaser, in return for a
premium, 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.
The writer of the put option, in return for the premium, has the obligation,
upon exercise of the option, to acquire the securities underlying the option at
the exercise price. The Fund as the writer of a put option might, therefore, be
obligated to purchase underlying securities for more than their current market
price.
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.
The Fund will write only "covered" options. An option is covered if the
Fund, so long as it is obligated under the option, owns an offsetting position
in the underlying securities 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 in a segregated account. See "Investment Objective and
Policies--Limitations on Purchase and Sale of Stock Options, Options on Stock
Indices and Stock Index Futures" in the Statement of Additional Information.
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<PAGE>
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 such options.
Over-the-Counter Options. The Fund may also purchase and write (i.e.,
sell) put and call options on equity and debt securities and on stock indexes
in the over-the-counter market (OTC options). Unlike exchange-traded options,
OTC options are contracts between the Fund and its counterparty without the
interposition of any clearing organization. Thus, the value of an OTC option is
particularly dependent on the financial viability of the OTC counterparty. The
Fund's ability to purchase and write OTC options may be limited by market
conditions, regulatory limits and tax considerations. There are certain risks
associated with investments in OTC options. See "Investment Objectives and
Policies--Special Risks of Purchasing OTC Options" in the Statement of
Additional Information.
Stock Index Futures
The Fund may purchase and sell stock index futures which are traded on a
commodities exchange or board of trade for certain hedging and risk management
purposes in accordance with regulations of the Commodity Futures Trading
Commission.
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 stock index futures if, immediately thereafter, more than
one-third of its net assets would be hedged. In addition, except in the case of
a call written and held on the same index, the Fund will write call options on
indices or sell stock index futures only if the amount resulting from the
multiplication of the then current level of the index (or indices) upon which
the options or futures contract(s) is based, the applicable multiplier(s), and
the number of futures or options contracts which would be outstanding would not
exceed one-third of the value of the Fund's net assets. The Fund also may not
purchase or sell stock index futures for risk management purposes if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for such options would exceed 5%
of the liquidation value of the Fund's total assets. The Fund may purchase and
sell stock index futures, without limitation, for bona fide hedging purposes.
The Fund's successful use of stock index futures contracts and options on
indices depends upon its ability to predict the direction of the market
underlying the index and is subject to various additional risks. The
correlation between movements in the price of the stock index future and the
price of the securities being hedged is imperfect and there is a risk that the
value of the securities being hedged may increase or decrease at a greater rate
than the related futures contract, resulting in losses to the Fund. Certain
futures exchanges or boards of trade have established daily limits on the
amount that the price of a futures contract or related options may vary, either
up or down, from the previous day's settlement price. These daily limits may
restrict the Fund's ability to purchase or sell certain futures contracts or
related options on any particular day. In addition, if the Fund purchases
futures to hedge against market advances before it can invest in common stock
in an advantageous manner and the market declines, the Fund might create a loss
on the futures contract. In addition, the ability of the Fund to close out a
futures position or an option depends on a liquid secondary market. There is no
assurance that liquid secondary markets will exist for any particular futures
contract or option at any particular time. See "Investment Objective and
Policies" in the Statement of Additional Information.
The Fund's ability to enter into stock index futures and listed options is
limited by the requirements of the Internal Revenue Code of 1986, as amended
(the Internal Revenue Code), for qualification as a regulated investment
company. See "Taxes" in the Statement of Additional Information.
Risks of Hedging and Income Enhancement Strategies
Participation in the options or futures markets involves investment risks
and transaction costs to which the Fund would not be subject absent the use of
these strategies. If the investment adviser's prediction of movements in the
direction of
9
<PAGE>
the securities 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 and stock index futures include (1) dependence
on the investment adviser's ability to predict correctly movements in the
direction of specific securities being hedged or the movement in stock indices;
(2) imperfect correlation between the price of options and stock index futures
and options thereon and movements in the prices of the securities 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; and (6) the possible inability of the Fund to purchase or
sell a portfolio security at a time that otherwise would be favorable for it to
do so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Investment
Objective and Policies" and "Taxes" in the Statement of Additional Information.
Forward Foreign Currency Exchange Contracts
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (typically large
commercial banks) and their customers. A forward contract generally has no
deposit requirements, and no commissions are charged for such trades. See
"Investment Objective and Policies--Forward Foreign Currency Exchange
Contracts" in the Statement of Additional Information.
When the Fund invests in foreign securities, the Fund may enter into
forward contracts in several circumstances to protect the value of its
portfolio. The Fund may not use forward contracts to generate income, although
the use of such contracts may incidentally generate income. There is no
limitation on the value of forward contracts into which the Fund may enter.
However, the Fund's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency. The Fund will not speculate in forward contracts. The
Fund may not position hedge with respect to a particular currency for an amount
greater than the aggregate market value (determined at the time of making any
sale of a forward contract) of securities held in its portfolio denominated or
quoted in, or currently convertible into, such currency.
When the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when the Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars for the purchase or sale of the amount of foreign currency involved in
the underlying transaction, the Fund will be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the date
on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received. Additionally, when the investment adviser believes that the currency
of a particular foreign country may suffer a substantial decline against the
U.S. dollar, the Fund may enter into a forward contract, for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities of the Fund denominated in such foreign
currency. Requirements under the Internal Revenue Code for qualification as a
regulated investment company may limit the Fund's ability to engage in
transactions in forward contracts. See "Taxes" in the Statement of Additional
Information.
Futures Contracts On Foreign Currencies and Options On Futures Contracts
The Fund may buy and sell futures contracts on foreign currencies and
groups of foreign currencies (futures contracts) such as the European Currency
Unit and related options thereon solely for hedging purposes. A European
Currency Unit is a basket of specified amounts of the currencies of certain
member states of the European Economic Community, a Western European economic
cooperative organization including, inter alia, France, Germany, The
Netherlands and the United Kingdom.
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<PAGE>
The Fund will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
A "sale" of a futures contract means the assumption of a contractual
obligation to deliver the specified amount of foreign currency at a specified
price in a specified future month. A "purchase" of a futures contract means
the assumption of a contractual obligation to acquire the currency called for
by the contract at a specified price in a specified future month. At the time
a futures contract is purchased or sold, the Fund must allocate cash or
securities as a deposit payment (initial margin). Thereafter, the futures
contract is valued daily and the payment of "variation margin" may be
required, resulting in the Fund's providing or receiving cash that reflects
any decline or increase in the contract's value, a process known as "marking
to market".
The Fund intends to engage in futures contracts on foreign currencies and
options on these futures transactions as a hedge against changes in the value
of the currencies to which the Fund is subject or to which the Fund expects to
be subject in connection with future purchases, in accordance with the rules
and regulations of the Commodity Futures Trading Commission (the CFTC). The
Fund also intends to engage in such transactions when they are economically
appropriate for the reduction of risks inherent in the ongoing management of
the Fund.
Options On Foreign Currencies
The Fund may purchase and write put and call options on foreign currencies
traded on securities exchanges or boards of trade (foreign and domestic) for
hedging purposes in a manner similar to that in which forward foreign currency
exchange contracts and futures contracts on foreign currencies will be
employed. Options on foreign currencies are similar to options on stock, except
that the Fund has the right to take or make delivery of a specified amount of
foreign currency, rather than stock.
The Fund may purchase and write options to hedge the Fund's portfolio
securities denominated in foreign currencies. If there is a decline in the
dollar value of a foreign currency in which the Fund's portfolio securities are
denominated, the dollar value of such securities will decline even though the
foreign currency value remains the same. See "Special Considerations and Risks"
below. To hedge against the decline of the foreign currency, the Fund may
purchase put options on such foreign currency. If the value of the foreign
currency declines, the gain realized on the put option would offset, in whole
or in part, the adverse effect such decline would have on the value of the
portfolio securities. Alternatively, the Fund may write a call option on the
foreign currency. If the value of the foreign currency declines, the option
would not be exercised and the decline in the value of the portfolio securities
denominated in such foreign currency would be offset in part by the premium the
Fund received for the option.
If, on the other hand, the investment adviser anticipates purchasing a
foreign security and also anticipates a rise in the value of such foreign
currency (thereby increasing the cost of such security), the Fund may purchase
call options on the foreign currency. The purchase of such options could
offset, at least partially, the effects of the adverse movements of the
exchange rates. Alternatively, the Fund could write a put option on the
currency and, if the exchange rates move as anticipated, the option would
expire unexercised.
Risks of Investing In Foreign Currency, Forward Contracts, Options and Futures
The Fund's successful use of forward foreign currency exchange contracts,
options on foreign currencies, futures contracts on foreign currencies and
options on such contracts depends upon the investment adviser's ability to
predict the direction of the market and political conditions, which requires
different skills and techniques than predicting changes in the securities
markets generally. For instance, if the value of the securities being hedged
moves in a favorable direction, the advantage to the Fund would be wholly or
partially offset by a loss in the forward contracts or futures contracts.
Further, if the value of the securities being hedged does not change, the
Fund's net income would be less than if the Fund had not hedged since there are
transactional costs associated with the use of these investment practices.
These practices are subject to various additional risks. The correlation
between movements in the price of options and futures contracts and the price
of the currencies being hedged is imperfect. The use of these instruments will
hedge only the currency risks associated with investments in foreign
securities, not market risks. In addition, if the Fund purchases these
instruments to hedge against currency advances before it invests in securities
denominated in such currency and the currency market declines, the Fund might
incur a loss on the futures contract. The Fund's ability to establish and
maintain positions will depend on market liquidity. The ability of
11
<PAGE>
the Fund to close out a futures position or an option depends upon a liquid
secondary market. There is no assurance that liquid secondary markets will
exist for any particular futures contract or option at any particular time. See
"Risks of Transactions in Options" and "Risks of Transactions in Futures
Contracts" under "Investment Objective and Policies" in the Statement of
Additional Information.
Limitations On Options and Futures Contracts
The Fund will not (a) write puts having aggregate exercise prices greater
than 25% of total assets, or (b) purchase (i) put options on foreign currencies
or (ii) call options on foreign currencies if, after any such purchase, the
aggregate premiums paid for such options would exceed 10% of the Fund's total
assets. There are no other limitations on the amount of foreign currencies that
may be hedged, and no limitations on the use of assets to cover options, except
that the aggregate value of the obligations underlying put options will not
exceed 50% of the Fund's assets. Requirements for qualification as a regulated
investment company under the Internal Revenue Code may limit the Fund's ability
to engage in transactions in options on foreign currencies. See "Taxes" in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES
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 repurchase date is usually within a
day or two of the original purchase, 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 instruments declines,
the Fund will require additional collateral. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, the Fund
may incur a loss. The Fund participates in a joint repurchase account with
other investment companies managed by Prudential Mutual Fund Management, Inc.
pursuant to an order of the Securities and Exchange Commission. The Fund may
invest up to 5% of its net assets in illiquid securities including repurchase
agreements which have a maturity of longer than seven days, securities with
legal or contractual restrictions on resale (restricted securities) and
securities that are not readily marketable. Restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933, as amended (the
Securities Act), that have a readily available market are not considered
illiquid for purposes of this limitation. The investment adviser 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 applicable notice period.
Illiquid Securities
The Fund may invest up to 5% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933, as amended, (the Securities Act) and privately placed commercial paper
that have a readily available market are not considered illiquid for purposes
of this limitation. The investment adviser 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 applicable notice period.
The staff of the 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 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."
Securities Lending
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount
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<PAGE>
equal to at least 100% of the market value of the securities loaned. During the
time portfolio securities are on loan, the borrower will pay 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. The Fund does not
presently intend to lend more than 5% of the value of its total assets and, as
a matter of fundamental policy, the Fund cannot 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 such vote was considered
important with respect to the Fund's investment in the securities on loan.
The Fund will enter into securities lending transactions only with parties
who meet creditworthiness standards approved by the Board of Directors. The
investment adviser monitors the creditworthiness of such parties under the
Board of Directors' general supervision.
Borrowing
The Fund may borrow an amount equal to no more than 20% of the value of
its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
Portfolio Turnover
The Fund anticipates that its annual portfolio turnover rate will not
exceed 100% in normal circumstances.
SPECIAL CONSIDERATIONS AND RISKS
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 regulation of
foreign securities exchanges, brokers and listed companies than exists in the
United States. Dividends 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 the U.S. Government
or by domestic companies. In addition, 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.
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.
Shareholders should be aware that investing in the equity and fixed-income
markets of developing countries involves exposure to economies that are
generally less diverse and mature, and to political systems which can be
expected to have less stability than those of developed countries. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of developed countries. The risks associated with
investments in foreign securities, described above, may be greater with respect
to investments in developing countries.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in domestic securities
since the expenses of the Fund, such as custodial costs, valuation costs and
communication costs, as well as the rate of the management fee (.75 of 1% of
the Fund's average daily net assets), though similar to such expenses of other
international funds, are higher than those costs incurred by other investment
companies.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Such fundamental
policies cannot be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities. See "Investment Restrictions" in the
Statement of Additional Information.
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HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Fund's Manager conducts and
supervises the daily business operations of the Fund. The Fund's Subadviser
furnishes daily investment advisory services.
For the fiscal year ended October 31, 1993, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A and Class B shares were
1.56% and 2.24%, respectively. See "Financial Highlights". No Class C shares
were outstanding during the fiscal year ended October 31, 1993.
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 .75 of 1% 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 October 31, 1993, the Fund paid management
fees to PMF of .75% of the Fund's average net assets. See "Manager" in the
Statement of Additional Information.
As of June 30, 1994, PMF served as the manager of 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator of 29 closed-end investment companies, with aggregate assets of
approximately $47 billion.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), PIC furnishes investment advisory services
in connection with the management of the Fund and is reimbursed by PMF for its
reasonable costs and expenses incurred in providing such services. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is Daniel J. Duane, a Managing
Director and Chief Investment Officer for Global Equity Investments of
Prudential Investment Advisors, a unit of The Prudential Investment Corporation
(PIC). Mr. Duane has responsibility for the day-to-day management of the Fund's
portfolio. Mr. Duane has been employed by PIC as a portfolio manager since
1990. He was formerly with First Investors Asset Management from 1986 to 1990
as senior portfolio manager and head of global equity investments. Mr. Duane is
a Chartered Financial Analyst. Mr. Duane also serves as the portfolio manager
of the Prudential Series Fund Global Equity Portfolio, Prudential Global
Genesis Fund, Prudential Europe Growth Fund, Inc. and Prudential Pacific Growth
Fund, Inc.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, is a corporation organized under the laws of the State of
Delaware and serves as the distributor of the Class A shares of the Fund. It is
a wholly-owned subsidiary of PMF.
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, is a corporation organized under the
laws of the State of Delaware and serves as the distributor of the Class B and
Class C shares of the Fund. It is an indirect, wholly-owned subsidiary of
Prudential.
Under separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and separate
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<PAGE>
distribution agreements (the Distribution Agreements), PMFD and Prudential
Securities (collectively, the Distributor) incur the expenses of distributing
the Fund's Class A, Class B and Class C shares. These expenses include
commissions and account servicing fees paid to, or on account of, financial
advisers of Prudential Securities and representaties of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions and account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements
with the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The
State of Texas requires that shares of the Fund may be sold in that state only
by dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
Under the Class A Plan, the Fund may pay PMFD for its distribution-related
activities with respect to Class A shares at an annual rate of up to .30 of 1%
of the average daily net 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. PMFD has agreed to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending
October 31, 1994.
For the fiscal year ended October 31, 1993, PMFD received payments of
$42,818 under the Class A Plan. This amount was primarily expended for payment
of account servicing fees to financial advisers and other persons who sell
Class A shares. For the fiscal year ended October 31, 1993, PMFD also received
approximately $220,700 in initial sales charges.
Under the Class B Plan, the Fund pays Prudential Securities for its
distribution-related activities with respect to Class B shares at an annual
rate of .75 of 1% of average daily net assets of the Class B shares up to the
level of the average daily net assets of the Fund as of February 26, 1986,
plus 1% of average daily net assets of the Class B shares in excess of such
level. Under the Class C Plan, the Fund pays Prudential Securities for its
distribution-related expenses with respect to the Class C shares at an annual
rate of 1% of average daily net assets of Class C shares. The Class B and
Class C Plans provide for the payment to Prudential Securities of (i) an
asset-based sales charge of, with respect to the Class B shares, .50 of 1% of
the average daily net assets of the Class B shares up to the level of the
average daily net assets of the Fund on February 26, 1986, plus .75 of 1% of
the average daily net assets of the Class B shares in excess of such level,
and, with respect to the Class C shares, .75 of 1% of the average daily net
assets of the Class C shares and (ii) a service fee of .25 of 1% of the
average daily net assets of the Class B and Class C shares, respectively. The
service fee is used to pay for personal service and/or the maintenance of
shareholders accounts. Prudential Securities also receives contingent deferred
sales charges from certain redeeming shareholders. See "Shareholder Guide--How
to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended October 31, 1993, Prudential Securities incurred
distribution expenses of approximately $2,541,600 under the Class B Plan and
received $1,609,543 from the Fund under the Class B Plan. In addition,
Prudential Securities received approximately $290,200 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended October 31, 1993.
For the fiscal year ended October 31, 1993, the Fund paid distribution
expenses of .20% and .88% of the average net assets of the Class A and Class B
shares, respectively. The Fund records all payments made under the Plans as
expenses in the calculation of net investment income. No Class C shares were
outstanding during fiscal year ended October 31, 1993. Prior to the date of
this Prospectus, the Class A and Class B Plans operated as "reimbursement type"
plans and, in the case of Class B, provided for the reimbursement of
distribution expenses incurred in current and prior years. See "Distributor" in
the Statement of Additional Information.
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<PAGE>
Distribution expenses attributable to the sale of shares of the Fund will
be allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons which
distribute shares of the Fund. Such payment may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may 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,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. 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.
- --------------------------------------------------------------------------------
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. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The Board of Directors has fixed the
specific time of day for the computation of the Fund's net asset value 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
NAV. 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.
16
<PAGE>
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the NAV of the three classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution-related expense accrual
differential among 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, Class B and Class C shares. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance
and takes into account any applicable initial or contingent deferred sales
charges. Neither "average annual" total return nor "aggregate" total return
takes into account any federal or state income taxes which may be payable upon
redemption. The "yield" refers to the income generated by an investment in the
Fund over a one-month or 30-day period. This income is then "annualized"; that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown
as a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund may
also 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, and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class 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."
- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Taxation of the Fund
The Fund has elected to qualify 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 and a charge in the
nature of interest with respect to certain gains and income realized by the
Fund. Under proposed Treasury regulations, the Fund would be able to avoid
such taxes and interest by electing to "mark-to-market" its investments in
PFIC'S i.e., treat them as sold for fair market value at the end of the year.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked to
market" for federal income tax
17
<PAGE>
purposes; that is, treated as having been sold at market value. Sixty percent
of any gain or loss recognized on these "deemed sales" and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. See "Taxes" in
the Statement of Additional Information.
Taxation of Shareholders
All dividends 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 28%. The maximum long-term capital gains rate for corporate
shareholders is currently the same as the maximum tax rate for ordinary income.
Dividends paid by the Fund will be 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.
The Fund has obtained opinions of counsel to the effect that neither(i)
the conversion of Class B shares into Class A shares nor(ii) the exchange of
Class B or Class C shares for Class A shares, constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes" in the
Statement of Additional Information.
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. Dividends of net
investment income and net 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).
Investment income received by the Fund from sources within foreign
countries may be subject to foreign income taxes withheld at source. If the
Fund should have more than 50% of the value of its assets invested in
securities of foreign corporations at the close of its taxable year, which is
the Fund's present intention, the Fund may elect to permit its shareholders to
take, either as a credit or as a deduction, their proportionate share of the
foreign income taxes paid.
Dividends and Distributions
The Fund expects to distribute annually to its shareholders all of its net
investment income and any net 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 charges,
generally resulting in lower dividends for Class B and Class C shares.
Distribution or net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares." As of October 31,
1993, the Fund has a capital loss carryforward for federal income tax purposes
of approximately $11,527,100, of which $1,370,900 expires in 1998, $6,017,600
expires in 1999 and $4,138,600 expires in 2000. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward.
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 dividend and
distributions in cash. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey
18
<PAGE>
08906-5015. 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. If you hold shares through
Prudential Securities, you should contact your financial adviser to elect to
receive dividends and distributions in cash.
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 (which generally occurs four business
days prior to the record date), the price you pay will include the dividend or
distribution and a portion of your investment will be returned to you as a
taxable distribution. You should, therefore, consider the timing of dividends
and distributions when making your purchases.
- -------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on February 28, 1984. The Fund is
authorized to issue 500 million shares of common stock, $.01 par value per
share, divided into three classes, designated Class A, Class B and Class C
common stock, each of which consists of 166,666,666 2/3 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 (i) each class bears
different distribution expenses, (ii) each class has exclusive voting rights
with respect to its distribution and service plan (except that the Fund has
agreed with the SEC in connection with the offering of a conversion feature on
Class B shares to submit any amendment of the Class A distribution and service
plan to both Class A and Class B shareholders), (iii) each class has a
different exchange privilege and (iv) only Class B shares have a conversion
feature. See "How the Fund is Managed--Distributor." The Fund has received an
order from the SEC permitting the issuance and sale of multiple classes of
common stock. Currently, the Fund is offering three classes, designated Class
A, Class B and Class C shares. In accordance with the Fund's Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series of common stock and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Board may
determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion, preemptive
or other subscription rights. In the event of liquidation, each share of common
stock of the Fund is entitled to its portion of all of the Fund's assets after
all debt and expenses of the Fund have been paid. Since Class B and Class C
shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders. The Fund's shares do not have cumulative voting
rights for the election of Directors.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold annual
meetings of shareholders unless, for example, the election of Directors is
required to be acted on by shareholders under the Investment Company Act.
Shareholders have certain rights, including the right to call a meeting upon a
vote of 10% of the Fund's outstanding shares for the purpose of voting on the
removal of one or more Directors or to transact any other business.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under
the Securities Act of 1933. 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.
19
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
You may purchase shares of the Fund through Prudential Securities, Prusec or
directly from the Fund through its Transfer Agent, Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent). Attention: Investment Services,
P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services".
The purchase price is the NAV next determined following receipt of an
order by the Transfer Agent or Prudential Securities plus a sales charge which,
at your option, may be imposed either (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares".
Your dealer is responsible for forwarding payment promptly to the Fund.
The Distributor reserves the right to cancel any purchase order for which
payment has not been received by the fifth business day following the
investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
Purchase By Wire. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name,
address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company, Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Global Fund, Inc., specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State
Street directly and should be sure that the wire specifies Prudential Global
Fund, Inc., Class A, Class B or Class C shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by
wire is $1,000.
ALTERNATIVE PURCHASE PLAN
The Fund offers three classes of shares (Class A, Class B and Class C
shares) which allows you to choose the most beneficial sales charge structure
for your individual circumstances given the amount of the purchase, the length
of time you expect to hold the shares and other relevant circumstances
(Alternative Purchase Plan).
20
<PAGE>
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
------------------------------------- ------------------------ --------------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .25 of 1%)
Class B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
Class C Maximum CDSC of 1% of the lesser 1% Shares do not convert to another class
of the amount invested or the
redemption proceeds on redemptions
made within one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio
of investments of the Funds and have the same rights, except that (i) each
class bears the separate expenses of its Rule 12b-1 distribution and service
plan, (ii) each class has exclusive voting rights with respect to its plan
(except as noted under the heading "General Information--Description of Common
Stock"), and (iii) only Class B shares have a conversion feature. The three
classes also have separate exchange privileges. See "How to Exchange Your
Shares" below. The income attributable to each class and the dividends payable
on the shares of each class will be reduced by the amount of the distribution
fee of each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund
will receive different compensation for selling Class A, Class B and Class C
shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C shares.
In selecting a purchase alternative, you should consider, among other
things, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) that Class B shares automatically convert
to Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years
and do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C
shares.
If you qualify for a reduced sales charge on Class A shares, it may be
more advantageous for you to purchase Class A shares over either Class B or
Class C shares regardless of how long you intend to hold your investment.
However, unlike Class B and Class C shares, you would not have all of your
money invested initially because the sales charge on Class A shares is deducted
at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual
21
<PAGE>
distribution-related fee on those shares to exceed the initial sales charge
plus cumulative annual distribution-related fee on Class A shares. This does
not take into account the time value of money, which further reduces the impact
of the higher Class B or Class C distribution-related fee on the investment,
fluctuations in net asset value, the effect of the return on the investment
over this period of time or redemptions during which the CDSC is applicable.
All purchases of $1 million or more, either as part of a single investment
or under Rights of Accumulation or Letters of Intent, must be for Class A
shares. See "Reduction and Waiver of Initial Sales Charges" below.
Class A Shares
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
<TABLE>
<CAPTION>
Sales Charge As Sales Charge As Dealer Concession
Percentage of Percentage of Net as Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$0 to $24,999 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined
in the Securities Act.
Reduction and Waiver of Initial Sales Charges. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or members. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
record keeping (Direct Account Benefit Plans) and Benefit Plans sponsored by
PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A
shares may be purchased at NAV by participants who are repaying loans made from
such plans to the participant.
Prudential Retirement Accumulation Program 401(k) Plan. Class A shares may
be purchased at net asset value, with a waiver of the initial sales charge, by
or on behalf of participants in the Prudential Retirement Accumulation Program
401(k) Plan for which the Transfer Agent or Prudential Securities provides
recordkeeping services (PruRap Plan), provided that (i) for existing plans, the
plan has existing assets of $1 million or more, as measured on the last
business day of the month, invested in shares of Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the
exchange privilege) held at the Transfer Agent or Prudential Securities and
(ii) for new plans, the plan initially invests $1 million or more in shares of
non-money market Prudential Mutual Funds or has at least 1,000 eligible
employees or members.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or the
PruRap Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Miscellaneous Waivers. In addition, Class A shares may be purchased at
NAV, through Prudential Securities or the Transfer Agent, by the following
persons: (a) Directors and officers of the Fund and other Prudential Mutual
Funds, (b) employees of Prudential
22
<PAGE>
Securities and PMF and their subsidiaries and members of the families of such
persons who maintain an "employee related" account at Prudential Securities or
the Transfer Agent, (c) employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service with
Prudential or one of its subsidiaries, (d) registered representatives and
employees of dealers who have entered into a selected dealer agreement with
Prudential Securities provided that purchases at NAV are permitted by such
person's employer and (e) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another investment
firm, provided that (i) the purchase is made within 90 days of the commencement
of the financial adviser's employment at Prudential Securities, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end,
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) on which no deferred sales load, fee or other charge was imposed on
redemption and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing
one of the deferred sales charge alternatives is the NAV next determined
following receipt of an order by the Transfer Agent or Prudential Securities.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charge".
HOW TO SELL YOUR SHARES
You can redeem shares of the Fund at any time for cash at the NAV next
determined after the redemption request is received in proper form by the
Transfer Agent or Prudential Securities. See "How The Fund Values Its Shares."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares by contacting your Prudential Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent in order for the
redemption request to be processed. If redemption is requested by a
corporation, partnership, trust or fiduciary, written evidence of authority
acceptable to the Transfer Agent must be submitted before such request will be
accepted. All correspondence and documents concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services, Inc., Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid
to a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Prudential Preferred
Financial Services offices.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent of the certificate and/or
written request except as indicated below. If you hold shares through
Prudential Securities, payment for shares presented for redemption will be
credited to your Prudential Securities account, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times (a)
when the New York Stock Exchange is
23
<PAGE>
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 SEC shall govern
as to whether the conditions prescribed 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 check.
Redemption In Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How The Fund Values Its Shares". If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Fund, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90-day period for any one
shareholder.
Involuntary Redemption. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less 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 net asset
value next determined after the order is received, which must be within 30 days
after the date of the redemption. No sales charge will apply to such
repurchases. You will receive pro rata credit for any contingent deferred sales
charge paid in connection with the redemption of Class B or Class C shares. You
must notify the Fund's Transfer Agent, either directly or through Prudential
Securities or Prusec, at the time the repurchase privilege 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 not be allowed for federal income tax purposes.
Contingent Deferred Sales Charges
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales Charges--
Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your 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 CDSC will be calculated from the first day of the month after
the initial purchase, excluding the time shares were held in a money market
fund. See "How to Exchange Your Shares."
24
<PAGE>
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
Contingent Deferred Sales
Charge as a Percentage of
Year Since Purchase Dollars Invested or
Payment Made Redemption Proceeds
------------ -------------------------
First ............................ 5.0%
Second ........................... 4.0%
Third ............................ 3.0%
Fourth ........................... 2.0%
Fifth ............................ 1.0%
Sixth ............................ 1.0%
Seventh .......................... None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding
six years (five 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 NAV had appreciated to $12 per share, the value of your Class B
shares would be $1,260 (105 shares at $12 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds
($500 minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
Waiver of the Contingent Deferred Sales Charges--Class B Shares. The CDSC
will be waived in the case of a redemption following the death or disability
of a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), or a trust, at the time of death or
initial determination of disability, provided that the shares were purchased
prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the
Internal Revenue Code from a tax-deferred retirement plan, an IRA or Section
403(b) custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after
retirement; (ii) in the case of an IRA or Section 403(b) custodial account, a
lump-sum or other distribution after attaining age 59 1/2; and (iii) a
tax-free return of an excess contribution or plan distributions following the
death or disability of the shareholder, provided that the shares were
purchased prior to death or disability. The waiver does not apply in the case
of a tax-free rollover or transfer of assets, other than one following a
separation from service (i.e., following voluntary or involuntary termination
of employment or following retirement). Under no circumstances will the CDSC
be waived on redemptions resulting from the termination of a tax-deferred
retirement plan, unless such redemptions otherwise qualify for a waiver as
described above.
In the case of Direct Account and PSI or Subsidiary Prototype Benefit
Plans, the CDSC will also be waived on the 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 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.
25
<PAGE>
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. The waiver will be granted subject
to confirmation of your entitlement. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the
Statement of Additional Information.
CONVERSION FEATURE CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated
that conversions will occur during the months of February, May, August and
November commencing in or about February 1995. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following formula:
(i) the ratio of (a) the amounts paid for Class B shares purchased at least
seven years prior to the conversion date to (b) the total amount paid for all
Class B shares purchased and then held in your account (ii) multiplied by the
total number of Class B shares purchased and then held in your account. Each
time any Eligible Shares in your account convert to Class A shares, all shares
or amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less than
the number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares. The conversion feature described above will not be implemented
and, consequently, the first conversion of Class B shares will not occur
before, February, 1995, but as soon thereafter as practicable. At that time all
amounts representing Class B shares then outstanding beyond the applicable
conversion period will automatically convert to Class A shares together with
all shares or amounts representing Class B shares acquired through the
automatic reinvestment of dividends and distributions then held in your
account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, and Class C shares
will not constitute "preferential dividends"
26
<PAGE>
under the Internal Revenue Code and (ii) that the conversion of shares does not
constitute a taxable event. The conversion of Class B shares into Class A
shares may be suspended if such opinions or rulings are no longer available. If
the conversions are suspended, Class B shares of the Fund will continue to be
subject, possibly indefinitely, to their higher annual distribution and service
fee.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Fund you have an exchange privilege with certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject to the minimum investment requirement of such funds. Class A,
Class B and Class C shares may be exchanged for Class A, Class B and Class C
shares, respectively, of another fund on the basis of the relative NAV. No
sales charge will be imposed at the time of the exchange. Any applicable CDSC
payable upon the redemption of shares exchanged will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund. For purposes of calculating the seven year holding period applicable to
the Class B conversion feature, the time period during which Class B shares
were held in a money market fund will be excluded. See "Conversion Feature--
Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
In order to exchange shares by telephone, you must authorize the
telephone exchange privilege 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 1 (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 or through a dealer which
has entered into a selected dealer agreement with the Fund's Distributor, you
must exchange your shares by contacting your 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 shareholders should make exchanges
by mail by writing to Prudential Mutual Fund Services, Inc., at the address
noted above.
Special Exchange Privilege. Commencing in or about February 1995, a
special exchange privilege is available for shareholders who qualify to
purchase Class A shares at NAV. See "Alternative Purchase Plan--Class A
Shares--Reduction and Waiver of Initial Sales Charges" above. Under this
exchange privilege, amounts representing any Class B and Class C shares (which
are not subject to a CDSC) held in such a shareholder's account will be
automatically exchanged for Class A shares on a quarterly basis, unless the
shareholder elects otherwise. It is currently anticipated that this exchange
will occur quarterly in February, May, August and November. Eligibility for
this exchange privilege will be calculated on the business day prior to the
date of the exchange. Amounts representing Class B or Class C shares which are
not subject to a CDSC include the following: (1) amounts representing Class B
or Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value above the total amount of payments for the purchase of Class B or Class
C shares and (3) amounts representing Class B or Class C shares held beyond
the applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
27
<PAGE>
The Exchange Privilege may be modified or terminated at any time on 60
days' notice.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
Automatic Reinvestment of Dividends and/or Distributions Without Sales
Charge. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec representative or
the Transfer Agent directly.
Tax Deferred Retirement Plans. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
Systematic Withdrawal Plan. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
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 report 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 is 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 1-800-225-1852 or,
from outside the U.S.A., at 1-908-417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
28
<PAGE>
PRUDENTIAL GLOBAL FUND, INC.
Statement of Additional Information
August 1, 1994
Prudential Global Fund, Inc. (the Fund) is an open-end, diversified
management investment company. Its investment objective is to seek long-term
growth of capital, with income as a secondary objective. The Fund will seek to
achieve its objective through investment in a diversified portfolio of
securities which will consist of marketable securities of U.S. and
non-U.S. issuers. The Fund may invest in all types of common stocks and
equivalents (such as convertible debt securities and warrants), preferred
stocks, bonds and other debt obligations, including money market instruments,
of foreign and domestic companies and governments, governmental agencies and
international organizations. There can be no assurance that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated August 1, 1994, a copy of
which may be obtained from the Fund at the address noted above.
TABLE OF CONTENTS
Cross-reference
to page in
Page Prospectus
---- ---------------
Investment Objective and Policies ................ B-2 7
Investment Restrictions .......................... B-10 13
Directors and Officers ........................... B-11 14
Manager .......................................... B-13 14
Distributor ...................................... B-15 14
Net Asset Value .................................. B-16 16
Portfolio Transactions and Brokerage ............. B-17 16
Purchase and Redemption of Fund Shares ........... B-18 20
Shareholder Investment Account ................... B-20 28
Performance Information .......................... B-24 17
Taxes ............................................ B-26 17
Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants .............. B-28 16
Financial Statements ............................. B-29 --
Independent Auditor's Report ..................... B-52 --
- -------------------------------------------------------------------------------
MF115B
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of
capital, with income as a secondary objective. The Fund will seek to achieve
its objective through investment in a diversified portfolio of securities
which will consist of marketable securities of U.S. and non-U.S. issuers. The
Fund may invest in all types of common stocks and equivalents (such as
convertible debt securities and warrants), preferred stocks, bonds and other
debt obligations, including money market instruments, of foreign and domestic
companies and governments, governmental agencies and international
organizations. 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%, though the Fund is not restricted from
investing in short-term obligations. There can be no assurance that the Fund's
investment objective will be achieved. For a further description of the Fund's
investment objective and policies, see "How the Fund Invests--Investment
Objective and Policies" in the Prospectus.
Limitations on Purchase and Sale of Options,
Options on Stock Indices and Stock Index Futures
The Fund may write put and call options only if they are covered, and
such options must remain covered so long as the Fund is obligated as a writer.
The Fund will not write put options on indices. The Fund has undertaken with
certain state securities commissions that, so long as shares of the Fund are
registered in those states, it will not (a) write puts having aggregate
exercise prices greater than 25% of total net assets; or (b) purchase (i) put
options on stocks not held in the Fund's portfolio, (ii) put options on stock
indices or (iii) call options on stocks or stock indices if, after any such
purchase, the aggregate premiums paid for such options would exceed 20% of the
Fund's total net assets.
Call Options. The Fund may, from time to time, write call options on its
portfolio securities. The Fund may write only call options which are
"covered," meaning that the Fund either owns the underlying security or has
an absolute and immediate right to acquire that security, without additional
cash consideration, upon conversion or exchange of other securities currently
held in its portfolio. In addition, the Fund will not permit the call to
become uncovered prior to the expiration of the option or termination through
a closing purchase transaction as described below. If the Fund writes a call
option, the purchaser of the option has the right to buy (and the Fund has the
obligation to sell) the underlying security at the exercise price throughout
the term of the option. The amount paid to the Fund by the purchaser of the
option is the "premium." The Fund's obligation to deliver the underlying
security against payment of the exercise price would terminate either upon
expiration of the option or earlier if the Fund were to effect a "closing
purchase transaction" through the purchase of an equivalent option on an
exchange. There can be no assurance that a closing purchase transaction can be
effected.
The Fund would not be able to effect a closing purchase transaction after
it had received notice of exercise. In order to write a call option, the Fund
is required to comply with the rules of The Options Clearing Corporation, with
respect to options traded on a United States exchange, and the various
exchanges with respect to collateral requirements. The Fund may not purchase
call options except in connection with a closing purchase transaction. It is
possible that the cost of effecting a closing purchase transaction may be
greater than the premium received by the Fund for writing the option.
Generally, the investment adviser intends to write listed covered call
options during periods when it anticipates declines in the market values of
portfolio securities because the premiums received may offset to some extent
the decline in the Fund's net asset value occasioned by such declines in
market value. Except as part of the "sell discipline" described below, the
investment adviser will generally not write listed covered call options when
it anticipates that the market values of the Fund's portfolio securities will
increase.
One reason for the Fund to write call options is as part of a "sell
discipline." If the investment adviser decides that a portfolio security
would be overvalued and should be sold at a certain price higher than the
current price, the Fund could write an option on the security at the higher
price. Should the security subsequently reach that price and the option is
exercised, the Fund would, in effect, have increased the selling price of that
security, which it would have sold at that price in any event, by the amount
of the premium. In the event the market price of the security declined and the
option were not exercised, the premium would offset all or some portion of the
decline. It is possible that the price of the security could increase beyond
the exercise price; in that event, the Fund would forego the opportunity to
sell the security at that higher price.
In addition, call options may be used as part of a different strategy in
connection with sales of portfolio securities. If, in the judgment of the
investment adviser, the market price of a security is overvalued and it should
be sold, the Fund may elect to write a call option with an exercise price
substantially below the current market price. As long as the value of the
underlying security remains above the exercise price during the term of the
option, the option will, in all probability, be exercised, in which case the
Fund will be required to sell the security at the exercise price. If the sum
of the premium and the exercise price exceeds the market price of the security
at the time the call option is written, the Fund would, in effect, have
increased the selling price of the security. The Fund would not write a call
option in these circumstances if the sum of the premium and the exercise price
were less than the current market price of the security.
Put Options. The Fund may also write listed put options. If the Fund
writes a put option, it is obligated to purchase a given security at a
specified price at any time during the term of the option.
B-2
<PAGE>
Writing listed put options is a useful portfolio investment strategy when
the Fund has cash or other reserves available for investment as a result of
sales of Fund shares or, more importantly, because the investment adviser
believes a more defensive and less fully invested position is desirable in
light of market conditions. If the Fund wishes to invest its cash or reserves
in a particular security at a price lower than current market value, it may
write a put option on that security at an exercise price which reflects the
lower price it is willing to pay. The buyer of the put option generally will
not exercise the option unless the market price of the underlying security
declines to a price near or below the exercise price. If the Fund writes a
listed put, the price of the underlying security declines and the option is
exercised, the premium, net of transaction charges, will reduce the purchase
price paid by the Fund for the security. The price of the security may decline
by an amount in excess of the premium, in which event the Fund would have
foregone an opportunity to purchase the security at a lower price.
If, prior to the exercise of a put option, the investment adviser
determines that it no longer wishes to invest in the security on which the put
option had been written, the Fund may be able to effect a closing purchase
transaction on an exchange by purchasing a put option of the same series as
the one which it has previously written. The cost of effecting a closing
purchase transaction may be greater than the premium received on writing the
put option and there is no guarantee that a closing purchase transaction can
be effected.
At the time a put option is written, the Fund will be required to
establish, and will maintain until the put is exercised or has expired, a
segregated account with its custodian consisting of cash, short-term U. S.
Government securities or other high-grade short-term debt obligations equal in
value to the amount the Fund will be obligated to pay upon exercise of the put
option.
Stock Index Options. Except as described below, the Fund will write call
options on indices only if on such date it holds a portfolio of stocks at
least equal to the value of the index times the multiplier times the number of
contracts. When the Fund writes a call option on a broadly-based stock market
index, the Fund will segregate or put into escrow with its Custodian, or
pledge to a broker as collateral for the option, one or more "qualified
securities" with a market value at the time the option is written of not less
than 100% of the current index value times the multiplier times the number of
contracts.
If the Fund has written an option on an industry or market segment index,
it will segregate or put into escrow with its Custodian, or pledge to a broker
as collateral for the option, at least ten "qualified securities," which are
securities 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
securities 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 25% of the amount so segregated, pledged or escrowed.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the Fund will
so segregate, escrow or pledge an amount in cash, Treasury bills or other
high-grade short-term obligations equal in value to the difference. In
addition, when the Fund writes a call on an index which is in-the-money at the
time the call is written, the Fund will segregate with its Custodian or pledge
to the broker as collateral cash, short-term U.S. Government securities 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 listed on the National Association of Securities
Dealers Automated Quotation System against which the Fund has not written a
stock call option and which has not been hedged by the Fund by the sale of
stock index futures. However, if the Fund holds a call on the same index as
the call written where the exercise price of the call held is equal to or less
than the exercise price of the call written or greater than the exercise price
of the call written if the difference is maintained by the Fund in cash,
Treasury bills or other high-grade short-term obligations in a segregated
account with its Custodian, it will not be subject to the requirements
described in this paragraph.
Stock Index Futures. The Fund will engage in transactions in stock index
futures contracts as a hedge against changes resulting from market conditions
in the values of securities which are held in the Fund's portfolio or which it
intends to purchase. The Fund will engage in such transactions when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Fund. The Fund may not purchase or sell stock index futures
if, immediately thereafter, more than one-third of its net assets would be
hedged and, in addition, except as described above in the case of a call
written and held on the same index, will write call options on indices or sell
stock index futures only if the amount resulting from the multiplication of
the then current level of the index (or indices) upon which the option or
future contract(s) is based, the applicable multiplier(s), and the number of
futures or options contracts which would be outstanding, would not exceed
one-third of the value of the Fund's net assets. The Fund also may not
purchase or sell stock index futures for risk management purposes if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for such options would exceed 5%
of the liquidation value of the Fund's total assets after taking into account
unrealized profits and unrealized losses on any such contracts, provided,
however, that in the case of an option that is in-the-money, the in-the-money
amount may be excluded in
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computing such 5%. The above restriction does not apply to the purchase and
sale of stock index futures for bona fide hedging purposes. In instances
involving the purchase of stock index futures contracts by the Fund, an amount
of cash, short-term U.S. Government securities or other high-grade short-term
debt obligations, equal to the market value of the futures contracts, will be
deposited in a segregated account with the Fund's Custodian and/or in a margin
account with a broker to collateralize the position and thereby insure that
the use of such futures is unleveraged.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the
Investment Company Act), are exempt from the definition of "commodity pool
operator," subject to compliance with certain conditions. The exemption is
conditioned upon a requirement that all of the Fund's commodity futures or
commodity options transactions constitute bona fide hedging transactions
within the meaning of the CFTC's regulations. The Fund will use stock index
futures and options on futures as described herein in a manner consistent with
this requirement. The Fund may also enter into commodity futures or commodity
options contracts for income enhancement and risk management purposes if the
aggregate initial margin and option premiums do not exceed 5% of the
liquidation value of the Fund's total assets.
Risks of Transactions in Stock Options. Writing of options involves the
risk that there will be no market in which to effect a closing transaction. An
option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally write only those options for which there appears to be an active
secondary market,there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange may exist. If the Fund as
a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
Risks of Options on Indices. The Fund's purchase and sale of options on
indices will be subject to risks described above under "Risks of Transactions
in Stock Options." In addition, the distinctive characteristics of options on
indices create certain risks that are not present with stock options.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular stock, whether the Fund
will realize a gain or loss on the purchase or sale of an option on an index
depends upon movements in the level of stock prices in the stock market
generally or in an industry or market segment rather than movements in the
price of a particular stock. Accordingly, successful use by the Fund of
options on indices would be subject to the investment adviser's ability to
predict correctly movements in the direction of the stock market generally or
of a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of stocks included in the index. If this occurred, the Fund would not be able
to close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the Fund's policy to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the CBOE 100). Since that time a number of additional index
option contracts have been introduced including options on industry indices.
Although the markets for certain index option contracts have developed rapidly,
the markets for other index options are still relatively illiquid. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain
that this market will develop in all index option contracts. The Fund will not
purchase or sell any index option contract unless and until, in the investment
adviser's opinion, the market for such options has developed sufficiently that
such risk in connection with such transactions is no greater than such risk in
connection with options on stocks.
Special Risks of Writing Calls on Indices. Because exercises of index
options are settled in cash, a call writer such as the Fund cannot determine
the amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Fund will write call options on indices only under the
circumstances described above under "Limitations on Purchase and Sale of
Options, Options on Stock Indices, Stock Index Futures and Options on Stock
Index Futures."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
portfolio. It is also possible that the index may rise when the Fund's
portfolio of stocks does not rise. If this occurred, the Fund would experience
a loss on the call which is not offset by an increase in the value of its
portfolio and might also experience a loss in its portfolio. However, because
the value of a diversified portfolio will, over time, tend to move in the same
direction as the market, movements in the value of the Fund in the opposite
direction as the market would be likely to occur for only a short period or to
a small degree.
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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 (in amounts not exceeding 20%
of the Fund's total assets) pending settlement of the sale of securities in
its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market
may decline between the time the Fund has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of
exercise, and the time the Fund is able to sell stocks in its portfolio. As
with stock options, the Fund will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on
stock where the Fund would be able to deliver the underlying securities in
settlement, the Fund may have to sell part of its stock portfolio in order to
make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more
than one option substantially more risky with index options than with stock
options. For example, even if an index call which the Fund has written is
"covered" by an index call held by the Fund with the same strike price, the
Fund will bear the risk that the level of the index may decline between the
close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the Fund exercises the call
it holds or the time the Fund sells the call which in either case would occur
no earlier than the day following the day the exercise notice was filed.
Special Risks of Purchasing Puts and Calls on Indices. If the Fund holds
an index option and exercises it before final determination of the closing
index value for that day, it runs the risk that the level of the underlying
index may change before closing. If such a change causes the exercised option
to fall out-of-the-money, the Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times
the applicable multiple) to the assigned writer. Although the Fund may be able
to minimize this risk by withholding exercise instructions until just before
the daily cut off time or by selling rather than exercising an option when the
index level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cut off times for index options may
be earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.
Special Risks of Purchasing OTC Options. When the Fund writes an OTC
option, it generally will be able to close out the OTC option prior to its
expiration only by entering into a closing purchase transaction with the
dealer with which the Fund originally wrote the OTC option. Any such
cancellation, if agreed to, may require the Fund to pay a premium to the
counterparty. While the Fund will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Fund,there can be no assurance that the Fund will be
able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in
a covered OTC call option the Fund has written, it will not be able to
liquidate securities used as cover until the option expires or is exercised or
different cover is substituted. Alternatively,the Fund could write an OTC call
option to, in effect, close an existing OTC call option or write an OTC put
option to close its position on an OTC put option. However, the Fund would
remain exposed to each counter party's credit risk on the put or call until
such option is exercised or expires. There is no guarantee that the Fund will
be able to write put or call options, as the case may be, that would
effectively close an existing position. In the event of insolvency of the
counterparty, the Fund may be unable to liquidate an OTC option.
In entering into OTC options, the Fund will be exposed to the risk that
the counterparty will default on, or be unable to complete, due to bankruptcy
or otherwise, its obligation on the option. In such event, the Fund may lose
the benefit of the transaction. The value of an OTC option to the Fund is
dependent upon the financial viability of the counterparty. If the Fund
decides to enter into transactions in OTC options, the Adviser will take into
account the credit quality of counter parties in order to limit the risk of
default by the counterparty.
OTC options may also be illiquid securities with respect to which no
secondary market exists. Similarly, the assets used to "cover" OTC options
written by the Fund will be treated as illiquid. OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC options it
writes for a maximum price to be calculated by a formula set forth in the
option agreement. The "cover" for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Accordingly, to the extent that OTC options are illiquid securities,
investments in illiquid OTC options will be subject to the limitations
applicable to investments in illiquid securities. See "Investment
Restrictions."
Forward Foreign Currency Exchange Contracts
Since investments in foreign companies will usually involve currencies of
foreign countries, and since the Fund may temporarily hold funds in bank
deposits in foreign currencies during the completion of investment programs,
the value of the assets of the Fund as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. The Fund will conduct
its foreign currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or
through entering into forward contracts to purchase or sell foreign
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currencies. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. These contracts are traded in the
inter bank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for such
trades.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Fund may desire to "lock-in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for a
fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold, or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when management of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
forward contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. The Fund will
not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. Under normal
circumstances,consideration of the prospect for currency parities will be
incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Fund believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will thereby be served. The
Fund's Custodian will place cash or liquid equity or debt securities into a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
If the Fund retains the portfolio security and engages in an off setting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Fund is not
required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be realized that this method of
protecting the value of the Fund's portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying
prices of the securities which are unrelated to exchange rates. It simply
establishes a rate of exchange which one can achieve at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time, they
tend to limit any potential gain which might result should the value of such
currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of
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currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Risks of Transactions in Options on Foreign Currencies
An option position may be closed out only on an exchange, board of trade
or other trading facility which provides a secondary market for an option of
the same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange or otherwise may exist. In such event it might not be
possible to effect closing transactions in particular options, with the result
that the Fund would have to exercise its options in order to realize any
profits and would incur brokerage commissions upon the exercise of call options
and upon the subsequent disposition of underlying currencies acquired through
the exercise of call options or upon the purchase of underlying currencies for
the exercise of put options. If the Fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it will
not be able to sell the underlying currency until the option expires or it
delivers the underlying currency upon exercise.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or a
clearing corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of
options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders. The Fund intends to purchase and sell only those options
which are cleared by a clearinghouse whose facilities are considered to be
adequate to handle the volume of options transactions.
Risks of Options on Foreign Currencies
Options on foreign currencies involve the currencies of two nations and
therefore, developments in either or both countries can affect the values of
options on foreign currencies. Risks include those described in the Prospectus
under "How the Fund Invests--Special Considerations and Risks," including
government actions affecting currency valuation and the movements of currencies
from one country to another. The quality of currency underlying option
contracts represent odd lots in a market dominated by transactions between
banks; this can mean extra transaction costs upon exercise. Options markets may
be closed while round-the-clock interbank currency markets are open, and this
can create price and rate discrepancies.
Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures contracts as
a hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the currency or group of currencies, the price of a
futures contract may move more or less than the price of the currencies being
hedged. Therefore, a correct forecast of currency rates, market trends or
international political trends by the Manager or Subadviser may still not
result in a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on
exchanges where there appears to be an adequate secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular contract or at any particular time. Accordingly, there can be no
assurance that it will be possible, at any particular time, to close a futures
position. In the event the Fund could not close a futures position and the
value of such position declined, the Fund would be required to continue to make
daily cash payments of variation margin. There is no guarantee that the price
movements of the portfolio securities denominated in foreign currencies will,
in fact, correlate with the price movements in the futures contracts and thus
provide an offset to losses on a futures contract. Currently, futures contracts
are available on the Australian Dollar, British Pound, Canadian Dollar,
Japanese Yen, Swiss Franc, DeutscheMark and Eurodollar.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act, are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exemption is conditioned upon a requirement that all of the Fund's futures or
options transactions constitute bona fide hedging transactions within the
meaning of the Commodity Futures Trading Commission's (CFTC's) regulations. The
Fund will use currency futures and
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options on futures in a manner consistent with this requirement. The Fund may
also enter into futures or related options contracts for income enhancement and
risk management purposes if the aggregate initial margin and option premiums do
not exceed 5% of the liquidation value of the Fund's total assets.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's Manager or Subadviser to predict correctly movements in
the direction of markets and other factors affecting currencies generally. For
example, if the Fund has hedged against the possibility of an increase in the
price of securities in its portfolio and price of such securities increases
instead, the Fund will lose part or all of the benefit of the increased value
of its securities because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash
to meet daily variation margin requirements, it may need to sell securities to
meet such requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be
reflected in the futures markets.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin account
which represents the amount by which the market price of the futures contract,
at exercise, exceeds, in the case of a call, or is less than, in the case of a
put,the exercise price of the option on the futures contract. Currently options
can be purchased or written with respect to futures contracts on the Australian
Dollar, British Pound, Canadian Dollar, Japanese Yen, Swiss Franc, DeutscheMark
and Eurodollar.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected.
Limitations on Purchase and Sale of Options on Foreign Currencies
and Futures Contracts on Foreign Currencies
The Fund will write put options on foreign currencies and futures
contracts on foreign currencies only if they are covered by segregating with
the Fund's Custodian an amount of cash or short-term investments equal to the
aggregate exercise price of the puts. The Fund will not (a) write puts having
aggregate exercise prices greater than 25% of total net assets; or (b) purchase
(i) put options on currencies or futures contracts on foreign currencies or
(ii) call options on foreign currencies if, after any such purchase, the
aggregate premiums paid for such options would exceed 10% of the Fund's total
net assets.
The Fund intends to engage in futures contracts and options on futures
transactions as a hedge against changes in the value of the currencies to which
the Fund is subject or to which the Fund expects to be subject in connection
with future purchases. The Fund also intends to engage in such transactions
when they are economically appropriate for the reduction of risks inherent in
the ongoing management of the Fund.
Illiquid Securities
The Fund may not invest more that 5% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of
a readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities because
of the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. A mutual fund
might also have to register such restricted securities in order to dispose of
them resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible
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securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment advisor anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser
will consider, inter alia, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (i.e. without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
Position Limits
Transactions by the Fund in futures contracts and options will be subject
to limitations, if any, established by each of the exchanges, boards of trade
or other trading facilities (including NASDAQ) governing the maximum number of
options in each class which may be written or purchased by a single investor or
group of investors acting in concert, regardless of whether the options are
written on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or
more brokers. Thus, the number of futures contracts and options which the Fund
may write or purchase may be affected by the futures contracts and options
written or purchased by other investment advisory clients of the Adviser. An
exchange, board of trade or other trading facility may order the liquidations
of positions found to be in excess of these limits, and it may impose certain
other sanctions.
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.
B-9
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting
shares are present in person or represented by proxy or (ii) more than 50% of
the outstanding voting shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Fund of initial or maintenance
margin in connection with futures or options is not considered the purchase
of a security on margin.
2. Make short sales of securities or maintain a short position.
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 the purpose
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, the purchase and sale of forward
foreign exchange contracts, options and futures contracts and any collateral
arrangements with respect to the purchase and sale of forward foreign
exchange contracts, options and 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, or instrumentalities) if as a result: (i) with respect to 75%
of the Fund's total assets, more than 5% of the Fund's total assets (taken at
current value) would then be invested in securities of a single issuer, 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 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
invest in real estate, although it may purchase or sell securities which are
secured by real estate and securities of companies which invest or deal in
real estate (for the purposes of this restriction, stock options, options on
debt securities, options on stock indices, stock indices futures, options on
stock index futures, futures contracts on currencies, options on such
contracts and forward foreign exchange contracts are not deemed to be a
commodity or commodity contract).
8. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% 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.
Although not fundamental policies, the Fund has agreed with various state
securities commissions that the Fund will not (i) invest in securities of any
issuer if, to the knowledge of the Fund, any officer or director of the Fund or
of the Manager 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 and, (ii)
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),
(iii) invest in securities of issuers which are restricted as to disposition,
if more than 15% of its total assets would be invested in such securities (This
restriction shall not apply to mortgage~backed securities, asset~backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) or (iv) invest more than 5% of its total assets
in securities of unseasoned issuers, including their
B-10
<PAGE>
predecessors, which have been in operation for less than three years, and in
equity securities of issuers which are not readily marketable.
Whenever any fundamental investment policy or investment restriction
states a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later change
in percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with Principal Occupations
Name and Address Fund During Past Five Years
- ---------------- ------------- ----------------------
<S> <C> <C>
Stephen C. Eyre Director Executive Director, The John A. Hartford Foundation, Inc. (charitable
c/o Prudential Mutual Fund foundation) (since May 1985); Director of Faircom, Inc.
Management, Inc.
One Seaport Plaza
New York, NY
Delayne Dedrick Gold Director Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
Don G. Hoff Director Chairman and Chief Executive Officer of Intertec, Inc. (investments)
c/o Prudential Mutual Fund since 1980; Director of Innovative Capital Management, Inc. The Asia
Management, Inc. Pacific Fund and The Greater China Fund.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. Director Senior Director (since January 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential Securities); formerly Interim Chairman and
New York, NY Chief Executive Officer of Prudential Mutual Fund Management Inc.
(PMF); (June-September 1993); formerly Chairman of the Board of
Prudential Securities (1982-1985); Chairman and Chief Executive
Officer of Bache Group Inc. (1977-1982); Trustee of The Trudeau
Institute; Director of The First Australia Fund, Inc., The First
Australia Prime Income Fund, Inc., The Global Government Plus Fund,
Inc., The Global Yield Fund, Inc. and the Center for National Policy.
Sidney R. Knafel Director Managing Partner of SRK Management Company (investments) since 1981;
c/o Prudential Mutual Fund Chairman of Insight Communications Company, L.P. and Microbiological
Management, Inc. Associates, Inc.; Director of Cellular Communications, Inc., Cellular
One Seaport Plaza Communications International, Inc., Cellular Communications of Puerto
New York, NY Rico, Inc., IGENE Biotechnology, Inc., International CabelTel
Incorporated, Medical Imaging Centers of America, Inc. and a number
of private companies.
Robert E. LaBlanc Director President of Robert E. LaBlanc Associates, Inc. (telecommunications)
c/o Prudential Mutual Fund since 1981; Director of Contel Cellular, Inc., M/A-COM, Inc., Storage
Management, Inc. Technology Corporation, TIE/communications, Inc., Tribune Company,
One Seaport Plaza Trustee of Manhattan College and Prudential U.S. Government Fund.
New York, NY
*Lawrence C. McQuade President and Vice Chairman of PMF (since 1988) and Managing Director, Investment
One Seaport Plaza Director Banking of Prudential Securities (1988-1991); Director, BUNZL, P.L.C.
New York, NY (since June 1991); Director, Quixote Corporation (since February
1992); formerly Director of Crazy Eddie Inc. (1987-1990) of Kaiser
Tech, Ltd., Kaiser Aluminum and Chemical Corp. (March 1987-November
1988); formerly Executive Vice President and Director of W. R. Grace
& Co. (1975-1987); President and Director of The High Yield Income
Fund, Inc., The Global Yield Fund, Inc. and The Global Government
Plus Fund, Inc.
<FN>
- --------------
* "Interested" director, as defined in the Investment Company Act, by reason of his affiliation with Prudential or PMF.
</FN>
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name and Address Fund During Past Five Years
- ---------------- ------------- ----------------------
<S> <C> <C>
Thomas A. Owens, Jr. Director Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker Director President, Chief Executive Officer and Director (since October 1993);
One Seaport Plaza Prudential Mutual Fund Management, Inc. (PMF); Executive Vice
New York, NY President; Director and Member of the Operating Committee (since
October 1993); Prudential Securities Incorporated (Prudential
Securities); Director (since October 1993) of Prudential Securities
Group, Inc. (PSG). Formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc. (September 1978-September
1993); Director of The Global Government Plus Fund, Inc. and The High
Yield Income Fund, Inc.
Clay T. Whitehead Director President of National Exchange Inc. (since May 1983).
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
David W. Drasnin Vice President Vice President and Branch Manager of Prudential Securities.
39 Public Square,
Suite 500 Wilkes Barre, PA
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990), Director (since
One Seaport Plaza January 1989) and Executive Vice President, Treasurer and Chief
New York, NY Financial Officer (since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities; Vice President and
Director (since May 1989) of The Asia Pacific Fund, Inc.
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior Counsel (since
One Seaport Plaza June 1987) and First Vice President (June 1987-December 1990) of
New York, NY PMF; Senior Vice President and Senior Counsel of Prudential
Securities (since July 1992); formerly Vice President and Associate
General Counsel of Prudential Securities.
Susan C. Cote Treasurer and Senior Vice President of PMF; Senior Vice President (since January
One Seaport Plaza Principal 1992) and Vice President (January 1986-December 1991) of
New York, NY Financial and Prudential Securities.
Accounting
Officer
Domenick Pugliese Assistant Vice President (since June 1992) and Associate General Counsel
One Seaport Plaza Secretary (since March 1992) of PMF; Vice President and Associate General
New York, NY Counsel of Prudential Securities (since July 1992); prior thereto, he
was associated with the law firm of Battle Fowler.
____________
<FN>
* "Interested" director, as defined in the Investment Company Act, by reason of his affiliation with Prudential or PMF.
</FN>
</TABLE>
B-12
<PAGE>
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 PMF annual compensation of $12,000, in addition to certain out-of-pocket
expenses. The chairman of the Audit Committee receives an additional $4,000 per
year.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of such agreement, the Fund accrues
daily the amount of Directors' fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90~day U.S. Treasury Bills at the
beginning of each calendar quarter or, pursuant to an SEC exemptive order, at
the daily rate of return of the Fund (the Fund rate). Payment of the interest
so accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund.
As of June 17, 1994, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of June 17, 1994, Prudential Securities was the record holder for other
beneficial owners of 1,407,233 Class A shares (or 32.2% of the outstanding
Class A shares) and 17,098,536 Class B shares (or 64.7% 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 to substantially all of the other investment companies that, together
with the Fund, comprise the "Prudential Mutual Funds." See "How the Fund is
Managed" in the Prospectus. As of June 30, 1994, PMF managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $47 billion and, according to the Investment Company
Institute, as of April 30, 1994 the Prudential Mutual Funds were the 12th
largest family of mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of the
Fund. PMF also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian, and Prudential
Mutual Fund Services, Inc.(PMFS or the Transfer Agent), the Fund's transfer and
dividend disbursing agent. The management services of PMF for the Fund are not
exclusive under the terms of the Management Agreement and PMF is free to, and
does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a
fee at an annual rate of .75 of 1% of the Fund's average daily net assets. 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. 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. Because the expenses incurred by the Fund are anticipated to
be higher than those of funds that invest only in U.S. securities, the Fund has
received waivers from applicable state expense limitations to exclude certain
foreign transactional expenses from expenses subject to the limitation.
In connection with its management of the corporate affairs of the Fund,
PMF bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel
except the fees and expenses of Directors who are not affiliated persons of PMF
or the Fund's investment adviser;
(b) all expenses incurred, by PMF or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed
by the Fund as described below; and
B-13
<PAGE>
(c) the costs and expenses payable to The Prudential Investment
Corporation (PIC) pursuant to the subadvisory agreement between PMF and PIC
(the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of
any trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Securities and
Exchange Commission, registering the Fund and qualifying its shares under state
securities laws, including the preparation and printing of the Fund's
registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Directors' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon
not more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Management
Agreement was last approved by the Board of Directors of the Fund, including a
majority of the Directors who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act on June 6,
1994 and by shareholders of the Fund on February 25, 1988. For the fiscal years
ended October 31, 1993, 1992 and 1991, PMF received management fees of
$1,538,624, $1,689,209 and $1,987,424, respectively.
PMF has entered into a Subadvisory Agreement (the Subadvisory Agreement)
with PIC (the Subadviser), a wholly-owned subsidiary of Prudential. The
Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection
therewith, PIC is obligated to keep certain books and records of the Fund. PMF
continues to have responsibility for all investment advisory services pursuant
to the Management Agreement and supervises PIC's performance of such services.
PIC is reimbursed by PMF for the reasonable costs and expenses incurred by PIC
in furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act
on June 6, 1994, and by shareholders of the Fund on February 25,1988.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than
30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
The Manager and the Subadviser (The Prudential Investment Corporation) are
subsidiaries of The Prudential which, as of December 31, 1993, was the largest
insurance company in North America. Prudential has been engaged in the
insurance business since 1875. In July 1993, Institutional Investor ranked The
Prudential the third largest institutional money manager of the 300 largest
money management organizations in the United States as of December 31, 1992.
B-14
<PAGE>
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 (Prudential Securities), acts as the distributor of the Class B and Class
C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares. See "How the Fund is
managed-distributor" in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
existing Class B shares). On October 17, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the
Fund and who have no direct or indirect financial interest in the operation of
the Class A or Class B Plan or in any agreement related to either Plan (the
Rule 12b-1 Directors), at a meeting called for the purpose of voting on each
Plan, adopted a new plan of distribution for the Class A shares of the Fund
(the Class A Plan) and approved an amended and restated plan of distribution
with respect to the Class B shares of the Fund (the Class B Plan). On June 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 the
continuance of the Plans and Distribution Agreements and approved modifications
of the Fund's Class A and Class B Plans and Distribution Agreements to conform
them with recent amendments to the National Association of Securities Dealers,
Inc. (NASD) maximum sales charge rule described below. As 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 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 .50 of 1% (not including the
service fee) per annum of the Fund's average daily net assets up to the level
of average daily net assets as of February 26, 1986, plus .75 of 1% (not
including the service fee) per annum of average daily net assets in excess of
such level may be used as reimbursement for distribution-related expenses with
respect to the Class B shares (asset-based sales charge). On June 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, adopted a plan of
distribution for the Class C shares of the Fund and approved further amendments
to the plans of distribution for the Fund's Class A and Class B shares changing
them from reimbursement type plans to compensation type plans. The Plans were
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on June 6, 1994. The Class A Plan, as amended, was approved by Class
A and Class B shareholders, and the Class B Plan, as amended, was approved by
Class B shareholders on July 19, 1994. The Class C Plan was approved by the
sole shareholder of Class C shares on August 1, 1994.
Class A Plan. For the fiscal year ended October 31, 1993 PMFD received
payments of $42,818 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisors and other persons
who sell Class A shares. For the fiscal year ended October 31, 1993. PMFD also
received approximately $220,700 in initial sales charges.
Class B Plan. For the fiscal year ended October 31, 1993, Prudential
Securities received $1,609,543 from the Fund under the Class B Plan and spent
approximately $2,541,600 in distributing the Fund's Class B shares. It is
estimated that of the latter amount approximately 0.1% ($3,000) was spent on
printing and mailing of prospectuses to other than current shareholders; 4.3%
($108,400) on compensation to Pruco Securities Corporation, an affiliated
broker-dealer, for commissions to its representatives and other expenses,
including an allocation of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
14.9% ($378,400) in interest and/or carrying charges and 80.7% ($2,051,800) on
the aggregate of (i) payments of commission and account servicing fees to
financial advisers (52.2% or $1,325,600) and (ii) an allocation of overhead and
other branch office distribution-related expenses (28.5% or $726,200). The term
"overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities' branch offices in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (d) other incidental expenses relating to
branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by holders of Class B shares upon certain redemptions of
Class B shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended October
31, 1993, Prudential Securities received approximately $290,200 in contingent
deferred sales charges.
B-15
<PAGE>
Class C Plan. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class
C Plan.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the
holders of a majority of the outstanding shares of the applicable class on not
more than 30 days' written notice to any other party to the Plans. The Plans
may not be amended to increase materially the amounts to be spent for the
services described therein without approval by the shareholders of the
applicable class (by both Class A and Class B shareholders, voting separately,
in the case of material amendments to the Class A Plan), and all material
amendments are required to be approved by the Board of Directors in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report includes an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and
nomination of Rule 12b-1 Directors shall be committed to the Rule 12b-1
Directors.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law
against certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on June 6, 1994.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. Interest charges on unreimbursed distribution expenses
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The
6.25% limitation applies to the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible
for determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price on the day of valuation, or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service. Corporate bonds (other than convertible debt securities) and
U.S. Government securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed to
be over-the-counter, are valued on the basis of valuations provided by a
pricing service which uses information with respect to transactions in bonds,
quotations from bond dealers, agency ratings, market transactions in comparable
securities and various relationships between securities in determining value.
Convertible debt securities that are actively traded in the over-the-counter
market, including listed securities for which the primary value is believed to
be over-the-counter, are valued at the mean between the last reported bid and
asked prices provided by principal market makers or independent pricing agents.
Options on stock and stock indices traded on an exchange are valued at the mean
between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last
sales prices as of the close of the commodities exchange or board of trade.
Should an extraordinary event, which is likely to affect the value of the
security, occur after the close of an exchange on which a portfolio security is
traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. short-term debt securities are valued at cost, with
interest accrued or discount amortized to the date of maturity, if their
original maturity was 60 days or less, unless this is determined by the Board
of Directors not to represent fair value. short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
net asset value at 4:15 P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem Fund shares have been received or days on which changes in the
value of the Fund's portfolio securities do not affect net asset value.
B-16
<PAGE>
Net asset value is calculated separately for each class. The net asset
value of Class B and Class C shares will generally be lower than the net asset
value of Class A shares as a result of the larger distribution-related fee to
which Class B and Class C shares are subject. 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 expense accrual differential among the classes.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
options and futures contracts for the Fund, the selection of brokers, dealers
and futures commission merchants to effect the transactions and the negotiation
of brokerage commissions, if any. Purchases and sales of securities, options or
futures on a national securities exchange or board of trade are effected
through brokers or futures commission merchants who charge a negotiated
commission for their services; on foreign securities exchanges, commissions may
be fixed. Orders may be directed to any broker or futures commission merchant
including, to the extent and in the manner permitted by applicable law,
Prudential Securities and its affiliates. The term "Manager" as used in this
section includes the Subadviser.
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 or any affiliate in any transaction in which Prudential
Securities or any affiliate acts as principal. Thus, it will not deal in
over-the-counter securities with Prudential Securities acting as market maker,
and it will not execute a negotiated trade with Prudential Securities if
execution involves Prudential Securities' acting as principal with respect to
any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future, in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Manager will consider research and
investment services provided by brokers, dealers or futures commission
merchants who effect or are parties to portfolio transactions of the Fund, the
Manager or its clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Manager in connection with all of its
investment activities, and some of such services obtained in connection with
the execution of transactions for the Fund may be used in managing other
investment accounts. Conversely, brokers, dealers or futures commission
merchants furnishing such services may be selected for the execution of
transactions of such other accounts, whose aggregate assets are far larger than
those of the Fund, and the services furnished by such brokers, dealers or
futures commission merchants may be used by the Manager in providing investment
management for the Fund. 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 is authorized to pay higher commissions on brokerage transactions for
the Fund to brokers, dealers or futures commission merchants other than
Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Board of Directors from time
to time as to the extent and continuation of this practice. The allocation of
orders among brokers, dealers and futures commission merchants 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 or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the
Fund, the commissions,fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased or sold on a securities exchange
or board of trade during a comparable period of time. This standard would allow
Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker
in a commensurate arm's-length transaction. Furthermore, the Board of Directors
of the Fund, including a majority of the noninterested directors, has adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consis-
B-17
<PAGE>
tent with the foregoing standard. In accordance with Section 11(a) under
the Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions with Prudential Securities (or any
affiliate) are also subject to such fiduciary standards as may be imposed upon
Prudential Securities (or such affiliate) by applicable law.
The table presented below shows certain information regarding the payment
of commissions by the Fund, including the amount of such commissions paid to
Prudential Securities, for the three year period ended October 31, 1993.
<TABLE>
<CAPTION>
Fiscal Years ended October 31,
---------------------------------------
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund .................................. $952,800 $1,048,900 $2,865,300
Total brokerage commissions paid to Prudential Securities ..................... $ 0 $ 11,600 $ 72,200
Percentage of total brokerage commissions paid to Prudential Securities ....... 0% 1.1% 2.5%
</TABLE>
Of the total brokerage commissions, $1,134,731 or 97.02% were paid to
firms which provided research, statistical or other services to PMF during the
fiscal year ended October 31, 1993. PMF has not separately identified a portion
of such brokerage commissions as allocable to the provision of such research,
statistical or other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next
determined net asset value per share plus a sales charge which, at the election
of the investor, may be imposed either (i) at the time of purchase (Class A
shares), or (ii) on a deferred basis (Class B or Class C shares). See
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at October 31, 1993, the maximum offering price of the Fund's shares is
as follows:
Class A
Net asset value and redemption price per Class A share ........... $13.17
Maximum sales charge (5% of offering price) ...................... .69
------
Offering price to public ......................................... $13.86
======
Class B
Net asset value, offering price and redemption price
per Class B share* ............................................ $12.94
======
Class C
Net asset value, offering price and redemption price
per Class C share* ............................................ $12.94
======
- -----------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. Class C
shares did not exsist on October 31, 1993
Reduction and Waiver of Initial Sales Charges--Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of break points under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
B-18
<PAGE>
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or
group that holds 25% or more of the outstanding voting securities
of a company will be deemed to control the company, and a
partnership will be deemed to be controlled by each of its general
partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include the
following: 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 charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
Rights of Accumulation. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of the
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 or 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 shares
of the Fund and shares of other Prudential Mutual Funds. All shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market
funds other than acquired pursuant to the exchange privilege) which were
previously purchased and are still owned are also included in determining the
applicable reduction. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly
with the Transfer Agent or through Prudential Securities. Letters of Intent
are not available to individual participants in any retirement or group
plans.
A Letter of Intent permits a purchaser to establish a total investment
goal to be achieved by any number of investments over a thirteen-month period.
Each investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
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.
B-19
<PAGE>
Waiver of the Contingent Deferred Sales Charge--Class B Shares
The Contingent Deferred Sales Charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
Category of Waiver Required Documentation
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a letter
unable to engage in any substantial from a physician on the physician's
gainful activity by reason of any letterhead stating that the shareholder
medically determinable physical or (or, in the case of a trust, the
mental impairment which can be grantor) is permanently disabled. The
expected to result in death or to be letter must also indicate the date of
of long-continued and indefinite disability.
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date
of birth of the shareholder and (ii)
that the shareholder is over age 59 1/2
and is taking a normal distribution--
signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
Quantity Discount--Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
of the Fund following the second purchase was $550,000, the quantity discount
would be available for the second purchase of $450,000 but not for the first
purchase of $100,000. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1 million:
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%
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. The Fund makes available
to the shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at the net
asset value per share at the close of business on the record date. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash
B-20
<PAGE>
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. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws.
For retirement and group plans having a limited menu of Prudential Mutual
Funds, the Exchange Privilege is available for those funds eligible for
investment in 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
Structured Maturity Fund and 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 Money Mart Assets
Prudential Tax-Free Money Fund
Class B and Class C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may
be payable upon the redemption of Class B and Class C shares acquired as a
result of the 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 date of the initial purchase, rather than the date of the
exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
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 may be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a
money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of the month), the entire month will
be included in the CDSC holding period. Conversely, if shares are exchanged
into a money market fund prior to the last day of the month (and are held in
the money market fund on the last day of the month), the entire month will be
excluded from the CDSC holding period. For purposes of calculating the seven
year holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded.
B-21
<PAGE>
At any time after acquiring shares of other funds participating in the
Class B and Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B and Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the
Fund, or the Distributor, has the right to reject any exchange application
relating to such fund's shares.
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
- ----------
1 Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics,1992; The National Center for Educational Statistics; and
the U.S. Department of Education. Average costs for private institutions include
tuition, fees, room and board.
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."
- ----------
2 The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that
an investor's shares when redeemed may be worth more or less than their
original cost.
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account
or Prudential Securities Account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Stock certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
B-22
<PAGE>
In the case of shares held through the Transfer Agent (i) a $10,000
minimum account value applies, (ii) withdrawals may not be for less than $100
and (iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not 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 purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the systematic withdrawal plan, particularly if used in
connection with a retirement plan.
Tax-Deferred Retirement Plans
Various qualified 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 comparison
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 44,676 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ------------
1The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
B-23
<PAGE>
PERFORMANCE INFORMATION
Average Annual Total Return. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares.
Average annual total return is computed according to the following
formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable 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 charge but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return with respect to the Class B shares of the
Fund for the one and five year periods ended on April 30, 1994 and from
inception of the Fund on May 16, 1984 through April 30, 1994 was 22.47%, 7.05%
and 14.13%, respectively. The average annual total return with respect to the
Class B shares of the Fund for the one and five year periods ended on April 30,
1994 and from inception of the Fund through April 30, 1994, would have been
22.47%, 7.05% and 14.09%, respectively, without the subsidy of expenses. See
"Manager." The average annual total return with respect to the Class A shares
of the Fund for the one year ended April 30, 1994 and for the period January
22, 1990 (inception of the Fund) through April 30, 1994 was 21.63% and 6.42%,
respectively, with and without the subsidy of expenses. During these periods,
no Class C shares were outstanding. See "How the Fund Calculates Performance"
in the Prospectus.
Yield. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B and
Class C shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a-b
YIELD = 2 [(----------- +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a
representation by the Fund as to what an investment in the Fund will actually
yield for any given period. Yields for the Fund will vary based on a number of
factors including changes in net asset value, market conditions, the level of
interest rates and the level of Fund income and expenses.
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B
and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1,5 or 10
year periods (or fractional portion thereof)
of a hypothetical $1000 payment made at the beginning of
the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-24
<PAGE>
The aggregate total return with respect to the Class B shares of the Fund
for the one and five year periods ended on October 31, 1993 and from inception
of the Fund on May 16, 1984 through October 31, 1993 was 27.47%, 41.60% and
272.91%, respectively. The aggregate total return with respect to the Class B
shares of the Fund for the one and five year periods ended on October 31, 1993
and from inception of the Fund through October 31, 1993, would have been
27.47%, 41.60% and 271.82%, respectively, without the subsidy of expenses.
See"Manager." The aggregate total return with respect to the Class A shares
of the Fund for the one year ended October 31, 1993 and for the period January
22, 1990 through October 31, 1993 was 28.37% and 37.67%, respectively, with and
without the subsidy of expenses. During these periods, no Class C shares were
outstanding.
Performance Chart. 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 investment over the long-term and the rate of
inflation.1
GRAPHIC
1 Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500
Stock Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
B-25
<PAGE>
TAXES
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code for each taxable
year. Accordingly, the Fund must, among other things, (a) derive at least 90%
of its gross income from dividends, interest, proceeds from loans of securities
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such securities or currencies; (b) derive less than 30% of its gross income
from the sale or other disposition of securities or certain options, futures
and forward contracts 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, securities of other regulated investment companies and other
securities, with such other securities limited in respect of any one issuer to
an amount not greater than 5% of the Fund's assets, and not greater than 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 or the securities of other regulated investment
companies). These requirements may limit the Fund's ability to invest in other
types of assets.
As a regulated investment company, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided (among other things) that at least
90% of the Fund's net investment income including net short-term capital gains
earned in the taxable year is distributed. The Fund intends to distribute
annually to its shareholders all of its taxable net investment income, which
includes dividends, interest and any net short-term capital gains in excess of
net long-term capital losses. The Board of Directors of the Fund will determine
once a year whether to distribute any net long-term capital gains in excess of
any net short-term capital losses. In determining the amount of capital gains
to be distributed, any capital loss carryovers from prior years will be offset
against capital gains. A 4% nondeductible excise tax will be imposed on the
Fund to the extent the Fund does not meet certain distribution requirements by
the end of each calendar year.
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates between the time the Fund accrues income,
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such income or pays such liabilities, are treated as
ordinary income or ordinary loss for federal income tax purposes. Similarly,
gains or losses on the disposition of debt securities held by the Fund, if any,
denominated in a foreign currency, to the extent attributable to fluctuations
in exchange rates between the acquisition and disposition dates are also
treated as ordinary income or loss.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put or
writes a call thereon. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or
other termination of options on securities will generally be treated as gains
and losses from the sale of securities. If an option written by the Fund on
securities lapses or is terminated through a closing transaction, such as are
purchased by the Fund of the option from its holder, the Fund will generally
realize 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
transactions. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. The requirement that the Fund derive less than 30% of its
gross income from gains from the sale of stocks or securities held less than
three months may limit the Fund's ability to write or acquire options. Certain
of the Fund's transactions may be subject to wash sale and short sale
provisions of the Internal Revenue Code which may, among other things, require
the Fund to defer losses. In addition, debt securities acquired by the Fund may
be subject to original issue discount and market discount rules which may,
among other things, cause the Fund to accrue income in advance of the receipt
of cash with respect to interest.
Special rules 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. Sixty percent of any capital 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.
Forward currency contracts, options and futures contracts entered into by
the Fund may create "straddles" for federal income tax purposes and this may
affect the character and timing of gains or losses realized by the Fund on
such contracts or options or on the underlying securities. Straddles may also
result in the loss of the holding period of underlying property, and
therefore, the Fund's ability to enter into forward currency contracts,
options and futures contracts may be limited by the 30% of gross income test
described above.
A "passive foreign investment company" ("PFIC") is a foreign corporation
that, in general, meets either of the following tests: (a) at least 75% of its
gross income is passive or (b) an average of at least 50% of its assets
produce, or are held for the
B-26
<PAGE>
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or of any gain from disposition of the stock (collectively "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC income
as a taxable dividend to its shareholders. If the Fund elects to treat any PFIC
in which it invests as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain, even if they are not distributed to the
Fund; those amounts would be subject to the distribution requirements
applicable to the Fund described above. It may be very difficult, if not
impossible, to make this election because of certain requirements thereof.
Under proposed Treasury regulations, if the Fund does not or cannot elect to
treat such a PFIC as a "qualified electing fund", the Fund can make a
"mark-to-market" election, i.e., treat the shares of the PFIC as sold on the
last day of the Fund's taxable year, and thus avoid the special tax and
interest charge. The gains the Fund recognizes from the mark-to-market election
would be included as ordinary income in the net investment income the Fund must
distribute to shareholders, notwithstanding that the Fund would receive no cash
in respect of such gains. Proposed legislation in Congress could dramatically
change the manner in which U.S. shareholders of foreign corporations are taxed.
There can be no assurance that any such legislation will become law or, if so,
what its impact on U.S. shareholders of foreign corporations would be.
Dividends of net investment income will be taxable to a U.S. shareholder
as ordinary income regardless of whether such shareholder receives such
dividends in additional shares or in cash. Dividends received from the Fund
will be eligible for the dividends received deduction for corporate
shareholders only to the extent that the Fund's income is derived from certain
dividends received from domestic corporations. The amount of dividends
qualifying for the dividends received deduction will be designated as such in a
written notice to shareholders mailed not later than 60 days after the end of
the Fund's taxable year. Distributions of net long-term capital gains, if any,
will be taxable as long-term capital gains regardless of whether the
shareholder receives such distribution in additional shares or in cash and
regardless of how long the shareholder has held the Fund's shares, and will not
be eligible for the dividends received deduction for corporations. Any gain or
loss realized upon a sale or redemption of Fund shares by a shareholder who is
not a dealer in securities will be treated as long-term capital gain or loss if
the shares have been held for more than one year and otherwise as short-term
capital gain or loss. However, any loss realized by a shareholder upon the sale
of shares in the Fund held for six months or less will be treated as a
long-term capital loss to the extent of any net long-term capital gain
distributions received by the shareholder. Additionally, 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.
Any dividends or capital gains distributions received by a shareholder
will have the effect of reducing the net asset value of the Fund's shares by
the exact amount of the dividend or capital gains distribution. If the net
asset value of the shares should be reduced below a shareholder's cost as a
result of a dividend or capital gains distribution, such dividend or capital
gains distribution, although constituting a return of capital, will be taxable
as described above. 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.
A shareholder who sells or otherwise disposes of shares of the Fund 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.
Distributions of net investment income made to a nonresident alien
individual fiduciary, of a foreign estate or trust, foreign corporation or
foreign partnership (foreign shareholder) will be subject to U.S. withholding
tax at a rate of 30% (or lower treaty rate), unless the dividends are
effectively connected with the U.S. trade or business of the shareholder. Gains
realized upon the sale or redemption of shares of the Fund by a foreign
shareholder, and distributions of net long-term capital gains to a foreign
shareholder will generally not be subject to U.S. income tax unless the gain is
effectively connected with a trade or business carried on by the shareholder
within the United States or, in the case of a shareholder who is a nonresident
alien individual, the shareholder is present in the United States for more than
182 days during the taxable year and certain other conditions are met. In the
case of a foreign shareholder who is a nonresident alien individual, the Fund
may be required to withhold U.S. federal income tax at the rate of 31% of
distributions of net long-term capital gains unless IRS Form W-8 is provided.
If distributions are effectively connected with a U.S. trade or business
carried on by a foreign shareholder, distributions of net investment income and
net long-term capital gains will be subject to U.S. income tax at the graduated
rates applicable to U.S. citizens or domestic corporations. Transfers by gift
of shares of the Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of the
shares of the Fund held by such a shareholder at his death will be includable
in his gross estate for U.S. federal estate tax purposes. The tax consequences
to a foreign shareholder entitled to claim the benefits of an applicable tax
treaty may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
B-27
<PAGE>
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.
If the Fund is liable for foreign taxes, the Fund expects to meet the
requirements of the Internal Revenue Code for "passing-through" to its
shareholders foreign income taxes paid, but there can be no assurance that the
Fund will be able to do so. Under the Internal Revenue Code, if more than 50%
of the value of the Fund's total assets at the close of its taxable year
consists of stock or securities of foreign corporations, the Fund will be
eligible and may file an election with the Internal Revenue Service to
"pass-through" to the Fund's shareholders the amount of foreign income taxes
paid by the Fund. Pursuant to this election shareholders will be required to:
(i) include in gross income (in addition to taxable dividends actually
received) their pro rata share of the foreign income taxes paid by the Fund;
(ii) treat their pro rata share of foreign income taxes as paid by them; and
(iii) either deduct their pro rata share of foreign income taxes in computing
their taxable income or, subject to certain limitations, use it as a foreign
tax credit against U.S. income taxes imposed on foreign source income. For this
purpose, the portion of dividends paid by the Fund from its foreign source
income will be treated as such. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions. A shareholder that is a
nonresident alien individual or foreign corporation may be subject to U.S.
withholding tax on the income resulting from the election described in this
paragraph, but may not be able to claim a credit or deduction against such tax
for the foreign taxes treated as having been paid by such shareholder. A
tax-exempt shareholder will not ordinarily benefit from this election. The
amount of foreign taxes for which a shareholder may claim a credit in any year
will generally be subject to various limitations including a separate
limitation for "passive income," which includes, among other things,
dividends, interest and certain foreign currency gains.
Each shareholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign income taxes paid by the Fund will
"pass-through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign income taxes paid to each such country
and (b) the portion of the dividend which represents income derived from
sources within each such country.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B and Class C shares. See "Net Asset Value."
Distributions may be subject to additional state and local taxes.
Pennsylvania Personal Property Tax. The Fund has received a written letter
of determination from the Pennsylvania Department of Revenue that the Fund will
be subject to the Pennsylvania foreign franchise and corporate net income tax.
Accordingly, it is believed that Fund shares are exempt from Pennsylvania
personal property taxes. The Fund anticipates that it will continue such
business activities but reserves the right to suspend them at any
time,resulting in the termination of the exemption.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND
INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Fund. Subcustodians provide
custodial services for the Fund's foreign assets held outside the United
States. See "General Information--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. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. PMFS 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 October 31, 1993, the Fund incurred
fees of approximately $520,000 for the services of PMFS.
Deloitte & Touche, 1633 Broadway, New York, New York 10019, serves as the
Fund's independent accountants, and in that capacity audits the Fund's annual
financial statements.
B-28
<PAGE>
realized capital and currency gains, if any, annually. 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. These differences are primarily due to
differing treatments for foreign withholding taxes.
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 income to shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends and interest have been provided
for in accordance with the Fund's understanding of the applicable country's
tax rules and rates.
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of
such services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .75 of 1% of the average daily net assets of the Fund.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated ("PSI"),
which 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 fiscal year ended October 31, 1993. PMFD pays various broker-dealers,
including PSI and Pruco Securities Corporation ("Prusec"), affiliated
broker-dealers, 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 the Class B shares at an annual
rate of up to .75 of 1% of the average daily net assets up to the level of
average daily net assets as of February 26, 1986, plus 1% of the average daily
net assets in excess of such level.
The Class B distribution expenses include commission credits for payments
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 account servicing
fees incurred through the receipt of reimbursement payments from the Fund under
the plans and 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 $220,700 in
front-end sales charges resulting from sales of Class A shares during the
fiscal year ended October 31, 1993. From these fees, PMFD paid such sales
charges to dealers (PSI and Prusec) which in turn paid commissions to
salespersons.
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 payments made by the Fund
pursuant to the Class B Plan. PSI has advised the Fund that for the fiscal year
ended October 31, 1993, that it received approximately $290,200 in contingent
deferred sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Fund that at October 31, 1993, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges approximated $11,678,000.
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, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly owned subsidiary of
PMF, serves as the Fund's transfer agent and during the fiscal year ended
October 31, 1993, the Fund incurred fees of approximately $520,000 for the
services of PMFS. As of October 31, 1993, approximately $44,000 of such fees
were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments, for the fiscal year ended October 31, 1993 were $162,876,729 and
$137,928,274, respectively.
The United States federal income tax basis of the Fund's investments is
substantially the same as for financial reporting purposes and, accordingly, as
of October 31, 1993 net unrealized appreciation for federal income tax purposes
was
B-49
<PAGE>
$71,226,498 (gross unrealized appreciation--$77,167,676; gross unrealized
depreciation--$5,941,178).
For federal income tax purposes, the Fund has a capital loss carryforward
as of October 31, 1993 of approximately $11,527,100 of which $1,370,900 expires
in 1998 and $6,017,600 expires in 1999 and $4,138,600 expires in 2000. During
the fiscal year ended October 31, 1993 the Fund utilized approximately
$12,614,900 of its capital loss carryforward. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward.
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or Federal agency obligations. As of October
31, 1993, the Fund has a 0.9% undivided interest in the repurchase agreements
in the joint account. The undivided interest for the Fund represents
$12,337,000 in the principal amount. As of such date, each repurchase agreement
in the joint account and the collateral therefor were as follows:
CS First Boston Corp., 2.93%, in the principal amount of $360,000,000,
repurchase price $360,087,900, due 11/1/93, collateralized by $47,400,000 U.S.
Treasury Notes, 6.75%, due 2/28/97; $40,000,000 U.S. Treasury Notes, 11.25%,
due 2/15/95; $100,000,000 U.S. Treasury Bonds, 7.50%, due 11/15/16; $50,000,000
U.S. Treasury Bonds, 10.375%, due 11/15/12 and $50,000,000 U.S. Treasury Bonds,
12.00%, due 5/15/05; aggregate value including accrued interest--$368,368,052.
Goldman Sachs & Co., 2.93%, in the principal amount of $450,154,000,
repurchase price $450,263,913, due 11/1/93, collateralized by $104,915,000 U.S.
Treasury Bonds, 12.00%, due 8/15/13 and $200,000,000 U.S. Treasury Bonds,
10.75%, due 8/15/05; aggregate value including accrued interest--$462,739,932.
Kidder, Peabody & Co. Inc., 2.95%, in the principal amount of
$305,000,000, repurchase price $305,074,979, due 11/1/93, collateralized by
$210,030,000 U.S. Treasury Bonds, 9.875%, due 11/15/15; value including accrued
interest--$311,527,136.
Nomura Securities International, Inc., 2.90%, in the principal amount of
$60,889,000, repurchase price $60,903,715, due 11/1/93, collateralized by
$8,280,000 U.S. Treasury Notes, 7.75%, due 2/15/95; $25,000,000 U.S. Treasury
Notes, 7.375%, due 5/15/96 and $22,775,000 U.S. Treasury Notes, 8.875%, due
2/15/96; aggregate value including accrued interest--$62,140,276.
Smith Barney Shearson, Inc., 2.94%, in the principal amount of
$175,000,000, repurchase price $175,042,875, due 11/1/93, collateralized by
$4,465,000 U.S. Treasury Bonds, 12.00%, due 5/15/05; $11,435,000 U.S. Treasury
Notes, 9.125%, due 5/15/99; $75,000,000 U.S. Treasury Bonds, 8.125%, due
8/15/19 and $50,000,000 U.S. Treasury Bonds, 8.00%, due 11/15/21; aggregate
value including accrued interest--$178,771,706.
Note 6. Capital
The Fund offers both Class A and Class B shares. 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.
Transactions in shares of common stock were as follows:
Class A Shares Amount
---------- ------------
Year ended October 31, 1993:
Shares sold ............................ 7,605,778 $ 81,814,374
Shares reacquired ...................... (5,873,417) (61,680,363)
---------- ------------
Net increase in shares outstanding ..... 1,732,361 $ 20,134,011
========== ============
Year ended October 31, 1992:
Shares sold ............................ 5,694,636 $ 55,067,359
Shares reacquired ...................... (5,640,760) (54,729,390)
---------- ------------
Net increase in shares outstanding ..... 53,876 $ 337,969
========== ============
Class B
Year ended October 31, 1993:
Shares sold ............................ 6,320,592 $ 72,012,967
Shares reacquired ...................... (5,752,085) (59,018,641)
---------- ------------
Net increase in shares outstanding ..... 568,507 $ 12,994,326
========== ============
Year ended October 31, 1992:
Shares sold ............................ 2,945,501 $ 28,474,761
Shares reacquired ...................... (8,948,802) (86,535,208)
---------- ------------
Net decrease in shares outstanding ..... (6,003,301) $(58,060,447)
========== ============
B-50
